Market and product

Asia’s naphtha markets are likely to see limited bullish factors – at least in the early half of 2017 – on account of increased transatlantic deep-sea supply and a greater use of competing liquefied petroleum gas (LPG) feedstock, market sources said.

Weak market fundamentals might persist through next year against a backdrop of a recent crude oil rally and growing availability of naphtha cargoes in the region.

“Q1 [the first quarter] could be supported [by] seasonal demand … but it's suppressed by more arbs [arbitrage cargoes] coming in December and January,” a southeast Asia-based market source said.

“But moving forward in the year [2017] will be a bit more bearish with some crackers moving to run more LPG … 88-Ron [gasoline] Indonesian demand [could] drop, so naphtha blending demand will be lessened”, the source said.

Asia’s naphtha forward time spread had flipped in early December from a backwardation to a contango, which deepened on expectations of increased arbitrage flows from the West.

A contango market structure reflects weak fundamentals, with prompt month prices lower than forward months.

On 9 December, the forward time spread between the second half of January and the second half of February was assessed at a contango of $2.00/tonne, wider than the 50 cents/tonne contango recorded on 2 December. The spread was at a backwardation of 50 cents/tonne on 1 December.

Arbitrage cargoes estimated near 1.5mn tonnes are expected to arrive in Asia in January. The volume coming from the Mediterranean and northwest Europe will be the highest level in at least six months, according to traders.

Deep-sea supply flows at around 1.2m tonnes are already expected to land in Asia in December, up from around 600,000-700,000 tonnes estimated in November, traders said.

The recent rally in crude oil futures following a deal among global producers to trim output has generated downward pressure on naphtha crack spreads, even as Asia naphtha physical prices were driven up by gains in crude oil futures.

As of 9 December, Asia’s naphtha crack spread versus February ICE Brent crude was assessed at $55.83/tonne, levels not seen in seven weeks.

The spread was down from $58.60/tonne on 8 December and $61.00/tonne on 2 December, according to ICIS data.

“The [flipped] contango market is caused by arbitrage [flows]”, combined with a narrower naphtha and liquefied petroleum gas (LPG) spread, a regional market source said.

More producers are switching to cheaper LPG cracker feedstock over naphtha, the source said.

LPG presents better economics for regional petrochemical producers, while the naphtha market is awash with supply. The gas feedstock was estimated to be cheaper by about $30-40/tonne compared with naphtha for now, traders said.

Meanwhile, expansion is on the cards for Asia-Pacific crackers and refineries.

In South Korea, Lotte Chemical plans to expand the ethylene capacity of its Yeosu cracker to around 1.2m tonnes/year by 2018 from the current 1m tonnes/year, according to sources with knowledge of the matter.

In India, Bharat Petroleum Corp Ltd (BPCL) has ongoing expansion at its 190,000 bbl/day Kochi refinery. The refinery’s capacity will be raised to 310,000 bbl/day by March 2017, according to a source familiar with the matter.

Meanwhile, naphtha consumption from key importer China has slowed. In October, the country’s naphtha imports stood at 338,769 tonnes, down 27% year on year and 24% lower month on month, according to China Customs data.

But the market took heart from overall positive economic data in China, helping to cushion the negative sentiment.

China’s official manufacturing purchasing managers’ index (PMI) rose to a two-year high of 51.7 in November, up from 51.2 in October.

The PMI is a barometer of an economy’s manufacturing activities, with a reading of 50 or higher indicating an expansion, while a number below that denotes a contraction.

In downstream benzene markets, robust China demand has pushed up spot prices. The spread between naphtha and benzene consequently spiked to above $390/tonne as of 9 December from around $172/tonne at this time last year, ICIS data showed.

In the coming months, naphtha is expected to feel the pressure from having to compete with other available feedstocks like LPG.

Most crackers in Asia use naphtha as feedstock for production, but can substitute a portion of the feed with LPG.
Commodities trader Trafigura expects 2017 to see a heavy surplus of oil products, particularly diesel and naphtha, it said in its 2016 annual report.

“Looking forward, we expect naphtha to continue to lose ground in the petrochemical complex to other feedstocks such as LPG and ethane, with new ethane crackers coming online in the US and elsewhere,” said Trafigura head of oil and petroleum products trading Jose Larocca in the report.

“Key to success will be finding ways of maximising other uses of naphtha into gasoline blending, splitting, or as a diluent for crude oil,” Larocca said.

On 2 December, naphtha-based ethylene margins in northeast Asia stood at $665/tonne, down by some 0.3% from the previous week. LPG-based margins in the region rose by about 5.1% to $613/tonne in the same comparison, according to ICIS’ weekly margin report.