OUTLOOK ’15: Asia’s naphtha seen weak on supply glut, tepid demand

By Felicia Loo

SINGAPORE (ICIS)–Asia’s naphtha is set to be weak at least in the first half of 2015 in light of a global oil glut and bearish demand, traders said.

Open-spec prices have dived to more than three-year low level as crude futures plunged to fresh lows.

Compounding the situation is increasing naphtha supply from the US, European and Middle Eastern refiners, the traders said.

“The demand and supply situation is totally imbalanced,” said one trader.

Soaring refinery runs in the US and higher operating rates at the European refineries have pushed up supply availability of naphtha for exports to Asia.

The refinery margins have improved owing to crude weakness.

Asia has been receiving voluminous deep-sea inflows since September, with the trend set to last as US and European refiners pumping at high rates on burgeoning margin between a slump in crude oil prices and higher product values.

Around 2.0m tonnes of western deep-sea naphtha supply is estimated to arrive in January, increasing from 1.8m tonnes of arbitrage inflows in December.

The arbitrage flows hail from northwest Europe, the Mediterranean, Russia and the US.

Meanwhile, the current slump in oil price is caused by a global oversupply because US refiners have virtually ceased all imports of all light-sweet crudes by using its own domestically produced shale oil.

US crude oil production began climbing in 2009 where it averaged 5.30m bbl/day, according to the US Energy Information Administration and this increased to an average of 8.45m bbl/day in the first nine months of 2014, representing a 60% increase or an additional 3.15m barrels in the market.

Cutting production in light of a global slump has traditionally been fairly straight forward because Saudi Arabia would normally take the brunt.

However, the OPEC swing producer has insisted on maintaining production levels to maintain its market share and is willing to wait it out for a year at least. Saudi Arabia’s oil minister has also indicated that they may even increase production if they have new customers.

Abu Dhabi will be shipping out 300,000 tonnes more light naphtha each month starting from January or February next year, following the expansion of its Ruwais refinery, according to traders said.

The capacity of the 400,000 bpd refinery is slated to be doubled to 800,000 bpd, they added.

Currently, Abu Dhabi exports around half a million tonnes of naphtha each month on both term and spot basis, the traders said.

Demand wise, the outlook is deemed stable-to-soft amid weak economic data from China.

HSBC’s flash manufacturing purchasing managers’ index (PMI) for China dipped to a seven-month low of 49.5 in December amid a slowdown in domestic demand.

A PMI reading above 50 indicates an expansion, while a reading below 50 denotes a contraction in manufacturing activities.

The flash estimate is a preliminary reading, the full PMI reading for China’s manufacturing index reading will be published in January next year.

Meanwhile, the downstream petrochemical segment is seen lacklustre on account of weak demand in China.

China has imported 1.05m tonnes in combined volume of polyethylene (PE) and polypropylene (PP) in November, down by 1.6% from the previous month, according to local traders.

Some 674,000 tonnes of PE and 379,000 tonnes of PP were brought into the country last month, they said.

Compared with official data for October imports, November 2014 PE imports increased by 0.85%, while PP imports fell by 5.6%.

China Customs’ data on November imports will be released around 24 December.

However, the market is not all gloom and doom as it could seek solace from a lighter cracker maintenance for 2015.

There are at least 14 crackers that are slated for maintenance in 2015 versus 21 cracker turnarounds this year.

This would also hinge on whether run rates would be curtailed or on the change of alternative feedstock usage.

Taiwan’s Formosa Petrochemical Corp (FPCC) – Asia’s top spot buyer of naphtha — plans to reduce the run rates at its three crackers in Mailiao to around 90% next month from around 100% currently due to weaker margins, a company source had said.

The cut in operating rate will be implemented on 1 January, the source said.

FPCC has three crackers with a combined ethylene capacity of 2.93m tonnes/year.

The company also plans to replace naphtha with liquefied petroleum gas (LPG) for around 10% of the total feed in January, the source said.

Cracker margins have been under pressure from a recent collapse in regional propylene prices, and generally weaker prices for other olefins and aromatics.

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