INSIGHT: Increased naphtha supply will hit Asia soon

01 April 2009 23:01  [Source: ICIS news]

By John Richardson

SINGAPORE (ICIS news)--A 20-30% increase in potential naphtha supply in the second half of this year is probably the last thing that petrochemical producers would like to hear about at this particular time.

But, sadly, this is a the prediction of oil and gas consultancy Purvin & Gertz, as a new gas field comes on stream in India and increased condensate production and processing takes place in Abu Dhabi, along with the start-up of a new condensate splitter in Qatar.

Cheaper feedstock is obviously great news when supply and demand balances are in your favour.

Right now, though, and perhaps for as long as the next 3-4 years, the power resides with the buyers of petrochemicals who will be in an even stronger position to push for discounts if naphtha heads south.

A big factor - perhaps the biggest single factor - behind the petrochemical pricing rally, which began in mid-January, has been a rebound in the cost of naphtha.

Refineries were caught hugely off-guard by the inventory disaster of the fourth quarter of 2008 and, as a result, they saw crack spreads for all their products tumble into record negative territory.

For example, the crack spread between naphtha Japan and Brent fell to below minus $100 per tonne late last year, said N Ravivenkatesh, Singapore-based consultant with Purvin & Gertz.

Pricing for naphtha fell to a low point of $271/tonne cost and freight (CFR) Japan in mid-November 2008 as the world economy ground to a virtual halt.

Refineries have since made major adjustments and pricing and spreads have bounced back considerably.

Naphtha for delivery in the second half of May was indicated at between $444.50 – 445.50 CFR Japan on 1 April, according to global chemical market intelligence service ICIS pricing.

Refining margins recovered up until February, but have since shown further weakness because of declining middle-distillate demand.

Simple refinery or hydroskimming margins on a variable cost basis have again turned negative, although complex refineries (including fluid catalytic crackers and hydrocrackers) have remained marginally positive.

The outlook for the east of Suez naphtha market is for a balanced position in May and a shortage of 250,000 tonnes in June, Ravivenkatesh added.

But then the big naphtha-supply surge will begin, firstly through commissioning of the Reliance KG gas basin off the east coast of India, which is expected by the end of this month.

“The gas will be used to supply fertiliser and power plants that currently run on naphtha. This will therefore increase India’s naphtha exports,” said Ravivenkatesh.

Net exports, currently between 100,000-200,000 tonne/month will rise by an additional 100,000-150,000 tonne/month in May and June.

Eventually, though, shipments from India could increase by as much as 200,000-250,000 tonne/month.

Abu Dhabi National Oil Co (Adnoc) is due to increase condensate production and processing at a splitter in Ruwais splitter, Abu Dhabi - currently operating at low rates - in the second half of 2009.

This has the potential to produce 2-3m tonne/year of naphtha - as much as 200,000-250,000 tonne/month of extra supply into the market.

The splitter at Ras Laffan in Qatar is due to on stream in the second half of the year. This will produce about 3m tonne/year of naphtha.

“This adds up to around 600,000-700,000 tonne/month of additional supply with the total Asian deficit at 2.7m-2.8m tonne/month. We are taking about an extra 20-30%,” added the consultant.

Blending into gasoline is not expected to mop up much of the extra output.

“Gasoline markets have weakened recently because of a fall in demand. Demand is forecast to remain weak as the seasonal rise in consumption will be marginal due to poor economic conditions,” said Ravivenkatesh.

Petrochemical producers are facing their own demand crisis, although delays in Middle East projects are providing some relief on the supply side.

But a decline in naphtha pricing might not always result in curtailed supply from India and the two new splitters.

The new gas field will run mainly to supply the fertiliser and power plants while the splitter at Abu Dhabi is part of an integrated gas-processing project designed to make the United Arab Emirates self-sufficient.

The Ras Laffan splitter is connected to new liquefied natural-gas (LNG) projects that require the condensate to be extracted before the LNG can be exported.

The surge in crude - and the expectation that it might go as high as $200/bbl by the end of 2008 - was a major factor behind the disastrous inventory building in the first half of last year.

The prospects of another strong crude rally before the end of this year seem to be slim.

Quota discipline by OPEC has improved, but the economic news keeps getting worse.

Reduced output and an increase of hedging in commodities to protect against dollar weakness might therefore be easily offset by even-weaker demand for crude.

Most forecasts are for crude prices to average no higher than $55/bbl during the second half of 2009. 

Purvin & Gertz expects global oil demand to fall by 1m bbl/day in 2009 compared with last year.

In other words, don’t expect any support from crude in making your argument for maintaining or increasing petrochemical pricing.

By: John Richardson
+65 6780 4359

AddThis Social Bookmark Button

For the latest chemical news, data and analysis that directly impacts your business sign up for a free trial to ICIS news - the breaking online news service for the global chemical industry.

Get the facts and analysis behind the headlines from our market leading weekly magazine: sign up to a free trial to ICIS Chemical Business.

Printer Friendly

Get access to breaking chemical news as it happens.
ICIS Global Petrochemical Index (IPEX)
ICIS Global Petrochemical Index (IPEX). Download the free tabular data and a chart of the historical index