FocusAsia’s naphtha may face weaker backwardation on LPG switch

18 February 2010 06:01  [Source: ICIS news]

By Felicia Loo

SINGAPORE (ICIS news)--Asia’s naphtha is likely to face a narrower intermonth backwardation in the weeks ahead, as crackers in this region as well as in Europe may use more liquefied petroleum gas (LPG) in April, traders said on Thursday.

In Asia, the intermonth naphtha spread had weakened to $9.00/tonne (€6.57/tonne) in backwardation for the second-half March and second-half April contract on Thursday, half the spread of $18.00/tonne seen a month ago, according to global chemical market intelligence service ICIS pricing.

Backwardation refers to a market where spot prices are higher than future prices, representing strong demand for prompt cargoes.

“The naphtha market is neutral to bearish in the short term but in the medium term, it will be bearish. The backwardation will narrow further,” a trader said.

Another trader said: “LPG is cheaper for April. The naphtha crackers may switch to LPG.”

April LPG prices stood at $680.00/tonne versus $687.00/tonne for naphtha, traders added.

Asia might soon receive fresh naphtha supply from Europe, where naphtha inventories at independent tanks at Amsterdam-Rotterdam-Antwerp area – Europe’s oil hub – climbed to 55,000 tonnes in the week ended 11 February from 44,000 tonnes as of 4 February, the Reuters news agency reported.

“Europe should have some surplus naphtha as crackers start using LPG in March. The arbitrage economics, to move supply eastwards, may work out soon,” a trader said.

The benchmark naphtha crack spread had tumbled to a three-month low of $122.60/tonne against Brent crude on the close of Wednesday, reflecting the state of the market, according to ICIS pricing.

Peak naphtha cracker shutdowns in March and April, also led to lower spot requirements, traders said.

“Demand has decreased because of cracker maintenance in South Korea and Japan,” a trader in Tokyo said.

Overall in northeast Asia, some 223,000 tonnes/month of cracker capacities were expected to be taken off line during March and April, according to ICIS pricing.

Compounding the stress, there would be higher than expected naphtha exports from India as more power generators along the trunk lines migrated to gas usage from naphtha, traders said. India would export 700,000-750,000 tonnes of naphtha for March, up from an earlier estimate of less than 700,000 tonnes, they added.

“There is more naphtha supply from India and the Middle East. Also, there is surplus LPG,” a trader said.

Another trader said: “The Middle East naphtha supply has recovered following maintenance.”

A weakening downstream market also weighed on naphtha prices. Offers for spot ethylene for late February or early March arrival declined to $1,300-1,320/tonne CFR (cost and freight) NE (northeast) Asia last week against transactions concluded at above $1,350/tonne CFR Asia in the week ending 5 February, according to ICIS pricing.

That was a sharp fall from the 17-month high of $1,400/tonne CFR NE Asia reached in late January, when ethylene – the petrochemical building block – was underpinned by tight supply from the Middle East.

($1 = €0.73

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Read John Richardson and Malini Hariharan’s blog – Asian Chemical Connections

By: Felicia Loo

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