A steep backwardation combined with stronger naphtha prices is damaging blending margins for refiners in Northwest Europe, traders said Thursday.
A backwardated market is one in which the price of a product is lower going forward, so traders prefer to sell gasoline they have in tank, rather than take time blending product which will have lost value.
In addition, when the cost of feedstock naphtha -- a key component used in gasoline blending -- rises in value, it can also narrow the profit margin for making gasoline.
Currently, the gasoline market is in a backwardation of around $15-20/mt between prompt loading dates and the September swap.
Gasoline FOB basis Rotterdam is currently trading at a premium of around $20/mt over the September swap, around $930/mt.
"Blending margins are not good," a Europe-based trader said. "The backwardation makes it very difficult, production is not keeping up with demand."
Low production rates in Amsterdam-Rotterdam-Antwerp are supporting physical barge premiums, traders said.
In addition, rising naphtha prices this week mean feedstocks for the blend pool are more expensive.
The front-month naphtha crack spread -- the value of a refined product relative to the crude it is made from -- has narrowed, and the market has been supported.
The September naphtha crack spread rose above minus $6/barrel this week to be assessed at minus $5.55/b Wednesday.
