Singapore (Platts)--8Feb2013/515 am EST/1015 GMT

The physical backwardation in the Asian naphtha market peaked to an all-time high Friday as the twin factors of firm demand and supply shortages worked to push prices on an upward rally, trade sources said Friday.

At the Asian close, the one-month CFR Japan second-half March/second-half April physical spread was assessed at $42/mt, up $5/mt from Thursday. It surpassed the last high of $41.75/mt, registered on January 9, 2004, Platts data showed.

The jump followed strong bids by Sietco and BP shown during the Platts Market On Close assessment process, with the former bidding at $18.50/mt for a CFR Japan H1 April/H2 April physical cargo spread, while BP had a bid at $34/mt for a CFR Japan H1 April/H1 May physical spread. Both bids failed to attract any selling interest at the close of the MOC at 0430 GMT Friday.

On Thursday, the CFR Japan H1 April/H2 April spread had been assessed at $16.50/mt, while the CFR Japan H1 April/H2 May spread was assessed at $30/mt.

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"Naphtha demand is the best that we've seen in a long time, and prices are roofing," a trader said Friday.

An insatiable appetite for naphtha from Asia has led to the product finishing the week on a strong note. Apart from the backwardation structure, the CFR Japan benchmark physical naphtha flat price, or Mean of Platts Japan naphtha, extended gains to close up $8.50/mt at $1,018.25/mt Friday -- highest since April 24, 2012, when the MOPJ was assessed at $1,019.63/mt, Platts data showed.

In addition, the CFR Japan H1 April naphtha crack against April ICE Brent crude firmed $5.54/mt to reach a near 10-month high of $150.63/mt. Platts data showed that the crack, which measures the premium that naphtha can command over Brent crude, was last higher on April 13, 2012, when it was valued at $151.50/mt.

The gains come amid a constant pull for naphtha from Asia, with end-users running crackers at full rates in order to capitalize on good downstream petrochemical margins.

In addition, South Koran refinery turnarounds scheduled to take place in March and April have added a further boost to the market, traders said this week.

"Because of the South Korean refinery turnarounds in March and April, domestic production volumes of naphtha will be cut, so [South Korean] petrochemical companies will have to buy more [naphtha] from the spot market ... now that downstream petrochemical margins are good, end-users have to buy feedstock naphtha no matter what," a source said.

Despite the firm demand, however, naphtha supply has been faltering on the back of reduced supply from India and the Middle East as well as a thinning arbitrage from the West.

Market participants estimated Indian naphtha export volumes for February at 500,000 mt, down 100,000 mt from January, while exports from the Middle East have also been slender as naphtha has been kept within the region to use as blendstock in the gasoline pool.

Thinning arbitrage volumes from the Mediterranean have further compounded the issue. "The arbitrage still looks open on paper, but the Mediterranean has no cargoes left to spare," a trader said this week.

Sources said up to 1 million mt of arbitrage naphtha from the Mediterranean was expected to arrive in the Far East in February, and another 1.2 million mt is seen likely to arrive in March.

"The East has already siphoned off a lot of naphtha from the Mediterranean -- a lot of cargoes have been booked to go to Asia," a trader said this week.

"Also, gasoline fundamentals are picking up in the West, so naphtha has been flowing into the gasoline blending pool, and that has further reduced availabilities," he added.

Still, market participants said the Asian naphtha market may go through a possible downward move after the Lunar New Year holidays due to a lull in market activity with many traders expected to be away from their desks.

"This [the possible downward correction] won't last long however -- there's still an upside view to the market," a trader said late Friday, adding that more North Asian end-users are expected to come forward for spot cargoes for March delivery once market activity picks up following the holidays.

--Clarice Chiam, clarice_chiam@platts.com
--Edited by Haripriya Banerjee, haripriya_banerjee@platts.com

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