FocusAsian naphtha seen bearish for the rest of the year

16 July 2010 07:28  [Source: ICIS news]

By Felicia Loo

SINGAPORE (ICIS news)--Asian naphtha prices are likely to stay moribund for the rest of the year in the face of an armada of spot shipments from the Middle East and tepid demand, market sources said on Friday.

This would make naphtha the worst performing oil product across the barrel, they said.

On signs of poor market conditions, the price spread between first-half September and first-half October contracts sank to a contango of $7/tonne (€5.5/tonne) from a contango of $2/tonne early last week, while the naphtha crack spread against Brent crude futures plunged to a 13-month low of $60.20/tonne, ICIS data showed.

The deeper the contango, the worst the market gets. And there seemed to be no end of the tunnel and prices would face more downward pressure, sources said.

“Naphtha prices are freefalling. The market’s not getting any better, but worst,” said a naphtha trader in Singapore, who declined to be named.

The market was reeling from the repercussions of a recent cracker outage in Taiwan. An explosion on 7 July forced Formosa Petrochemical Corp to take off line its 700,000 tonne/year No 1 cracker in Mailiao, with the shutdown to last for two to three months.

Formosa was also seeking government approval to postpone the routine maintenance at its 1.03m tonne/year No 2 cracker at the same site, which was scheduled to be taken off line for 45 days from 20 August.

Meanwhile Formosa requested term suppliers to postpone the delivery of naphtha supply from August to December to alleviate the high inventory problem.

“Spot demand from Formosa will disappear. With this lingering problem, Asian naphtha demand will be very low,” said a second trader.

The other buyers have the last laugh at this point, sources said.

“It’s a buyer’s market. There’s no doubt about it,” one source added.

South Korea’s LG Chem bought 25,000 tonnes of spot open-spec naphtha at a severely deep discount of $12/tonne to Japan quotes CFR (cost and freight).

The company last bought a bigger volume of 100,000 tonnes of spot open-spec naphtha for first half of August delivery, at discount levels of between $4.00-5.00/tonne to Japan quotes CFR.

Sellers are feeling the pinch, as evident in a string of tender sales from India where refiners had to offload their supplies at wide discount levels, ICIS data showed.

For instance, Hindustan Petroleum Corp (HPCL) awarded its export tender for 25,000 tonnes of paraffinic naphtha at $3.50-5.00/tonne below Middle East quotes FOB (free on board). “The market will be bearish until the end of the year. There are absolutely no bullish factors at all,” a trader said.

With prices on a freefall, the Middle East producers were heavily squeezed and were forced to reverse some arbitrage shipments to Europe, but at limited levels amid ample stocks in the West, traders said.

The arbitrage economics, typically to move European naphtha to Asia, were completely not workable at a time like this, they said.

Globally, Asian naphtha is the worst performing oil product, traders said.

“There are relentless exports from the Middle East,” a trader said.

There has been a surge in spot Middle East shipments to Asia, as some producers cannot renew term contracts, while increased condensates feedstock supply has prompted Abu Dhabi National Oil Co (Adnoc) to churn out more naphtha from its splitter.

The upstream condensate market was hard hit by naphtha woes, with Qatar’s Tasweeq selling September condensate at Dubai quotes minus 50 cents/$1/bbl, traders said.

Downstream, ethylene prices weakened $10-30/tonne to $860-870/tonne CFR NE Asia, while the Asian toluene and xylenes market continued to wade in a glut.

Current high operating rates of reformers at regional petrochemical facilities was also expected to keep the Asian aromatics market oversupplied through the rest of the year, sources said.

A slowdown in Chinese economic growth in the second quarter signalled lower petrochemical demand from the world’s second-biggest energy consumer in the months ahead, they said.

“Petrochemical margins are poor and there is more downside than upside. There isn’t any rush in buying,” said a trader.

($1 = €0.78)

With additional reporting by Bohan Loh

Read John Richardson and Malini Hariharan’s blog – Asian Chemical Connections
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By: Felicia Loo

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