Focus story by Felicia Loo
SINGAPORE (ICIS)--Asia's naphtha backwardation will draw support from prospects of tightening deep-sea inflows, as Brazil is mopping up naphtha supply from Europe at a time of strong motor gasoline (mogas) blending demand in Europe, traders said on Thursday.
The intermonth spread between open-spec first-half May/first-half June contracts widened to $12.50/tonne in backwardation on 19 March, compared with $11.25/tonne in backwardation on 18 March, according to ICIS data.
At $12.50/tonne spread, the backwardation was at its strongest since 27 January this year when the backwardation closed at $13.00/tonne, the data indicated.
Europe is facing tight naphtha supply, owing to strong gasoline blending, while net buyer Asia needs the arbitrage supply, traders said.
"Gasoline [has] cleaned up the prompt [barrels]," one trader said.
Brazil has turned to raking in naphtha from the Mediterranean because strong demand in the US has tightened naphtha cargo availability, traders said.
"Brazil took the majority of the Skikda program which was bigger than usual," said the trader, referring to Sonatrach's 335,000 bpd refinery at Skikda -- the biggest refinery in Algeria.
Brazil is buying more naphtha for blending support, to meet increased demand for the World Cup that the country will host in June/July.
The naphtha crack spread against Brent crude futures firmed up to $129.63/tonne on 19 March, from $125.33/tonne a day ago, ICIS data showed.
On Thursday morning, open-spec first-half May contract stood at $927.50-930.50/tonne CFR (cost & freight) Japan, rising $1.50/tonne at the high end from Wednesday’s prices despite lower crude futures overnight, reflecting the firm fundamentals in Asia, it stated.
In addition, Europe has less naphtha exports bound for the east of Suez, after having contributed to the bulk of the 1.6m-1.7m tonnes of deep-sea naphtha imports into Asia for March. The rest of the arbitrage shipments to Asia hails from the US and Russia.
Some 230,000 tonnes of western deep-sea naphtha supply will be bound for Asia in May, and those were the confirmed quantities, traders said.
There were some pending fixtures and should they firm up, the arbitrage volumes would add up to 500,000 tonnes in May, still comparatively weaker than close to a million tonnes of deep-sea supply that Asia will be receiving in April, they added.
European gasoline exporters are gearing up for the seasonal switch to summer-grade gasoline, with stocks piling up at the ARA (Amsterdam-Rotterdam-Antwerp) hub in expectation of a pick-up in US demand, leading to a boost in sales for blendstock naphtha, industry sources said.
The US will increase its gasoline imports amid depleting inventories and lower refinery runs. The world's biggest economy will stockpile gasoline ahead of its summer driving season that kicks off in latter part of May.
For the week ended 14 March, finished motor gasoline inventories and consumption rates in the US fell, according to US Energy Information Administration (EIA).
Gasoline inventories dropped by 1.5m barrels to 222.3m barrels for that week, while refinery utilisation rates fell to 85.6% from 86.0% in the previous week. Imports of gasoline were 26,000 bbl/day higher at 421,000 bbl/day, while exports held steady at 576,000 bbl/day.
In Asia, naphtha is mainly used as cracking feedstock, but is also used a blending component for gasoline.
The prospects of receding deep-sea inflows have overshadowed a heftier cracker turnaround season this year, with six naphtha crackers in Japan – with a combined capacity of around 3.4m tonnes/year – shut between February and June, versus with two plant shutdowns in the country during the same period in 2013.
Indicating a run-up to a bullish market, recent naphtha tenders garnered higher premiums, traders said.
"The premums are crazy," said one trader.
Indian state-owned refiner Oil and Natural Gas Corp (ONGC) has sold by tender a 35,000-tonne naphtha cargo for loading from Hazira on 3-4 April, at a premium of $42.00/tonne to FOB (free on board) Middle East quotes and the buyer was Total.
In its previous tender, ONGC sold a similar-sized naphtha cargo for loading from Hazira on 19-20 March, to Chinese trading firm Unipec, at a premium of about $33.00/tonne to FOB Middle East quotes.
India's Essar Oil has sold by tender 35,000 tonnes of naphtha for loading from Vadinar on 8-12 April, at a premium of $33.50/tonne to FOB Middle East quotes, to Japanese firm ITOCHU.
Essar previously sold by tender a similar-sized naphtha cargo for loading from Vadinar on 26-30 March, to Thailand's PTT, at a premium of $24.00/tonne to FOB Middle East quotes.
Moreover, gasoline blending needs in Asia are expected to heighten as top regional fuel importers Indonesia and Vietnam will shore up their purchases of gasoline, thus boosting naphtha usage in the blending pool.
Vietnam's sole refinery, the 140,000 bbl/day Dung Quat plant, is scheduled for maintenance from May to July, prompting the country to import more gasoline to cover any shortfall in its domestic requirement.
Indonesia, on the other hand, will buy more gasoline overseas ahead of its presidential election in July.
Read John Richardson and Malini Hariharan’s blog – Asian Chemical Connections