Asia naphtha may gain on lower deep-sea supply, output cuts

SINGAPORE (ICIS)–Asia’s naphtha prices may strengthen amid a reduction in deep-sea supply, as well as prospects of lower regional production in response to weakening refinery margins, traders said on Monday.

First-half August open-spec naphtha prices rose by $17.75/tonne from 17 June to  $429.75-431.75/tonne CFR (cost and freight) Japan on Monday morning, according to ICIS data.

At the close of trade on 17 June, the naphtha crack spread versus August Brent crude futures strengthened by 18% from a week ago to $53.98/tonne, the data indicated.

“Arbitrage volumes are lower for July and there are likely to be refinery run cuts given poor margins,” said one trader.
Asia is facing a tightening pool of deep-sea inflows, which were estimated at 1.1m tonnes in July, versus 1.5m tonnes in June. May arbitrage volumes were pegged at 1.6m tonnes, according to traders.

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

The front-month east-west spread was quoted as stable at $14.25/tonne, the traders said.

Meanwhile, weakening refining margins will likely prompt refiners to consider reducing their operating rates and this will further curtail naphtha supply regionally.

Demand wise, the optimisation of liquefied petroleum gas (LPG) as an alternative feedstock for petrochemical production has reached its maximum, hence its impact on the naphtha market has been factored in.

While petrochemical demand remained by and large stable, with generally high runs, gasoline prices were bottoming out and this may support naphtha usage in the gasoline blending pool.

Naphtha prices were also improving as evident in the intermonth and swaps spreads.

The inter-month spread between the first half of August contract and the first half of September contract was assessed at a contango of $0.25/tonne on 17 June, compared with a contango of $2.00/tonne in the previous reporting week, ICIS data showed.

Over the same period, the inter-month spread between the second-half August contract and the second-half September contract was assessed at a contango of $0.50/tonne, compared with a contango of $2.00/tonne previously.

In the forward market curve, the swaps spread between August and September was assessed at a $1.00/tonne contango on 17 June, compared with a $1.75/tonne contango in the previous week.

Meanwhile, NYMEX WTI crude futures rose on 17 June for the first time following six consecutive down session on pre-weekend short-covering. The upcoming referendum in Britain regarding EU membership has triggered aggressive length liquidation on concerns about a potential economic slowdown in Europe.

The bargain-hunting overshadowed a sell-off in the stock market, while opinion regarding the vote shifted following the killing of a British Member of Parliament. A jump in drilling rigs for the third consecutive week failed to cap the rally, with crude prices actually extending the gains to new highs following the NYMEX close.

Downstream, prices for spot ethylene cargoes to northeast Asia were slightly firmer, rising by $5-10/tonne to $1,050-1,095/tonne CFR (cost and freight) NE (northeast) Asia during the week ended 17 June, as limited offers led some buyers with immediate requirements to purchase July-delivery cargoes at higher costs.

Downstream activity in east China may also see a pick-up before the government-mandated production cuts are implemented in the second half of August in the lead-up to the G20 summit. The price upside, however, is capped by weak downstream margins and concerns over the weaker Chinese currency.

In east China, some end-users are considering raising their production in July to make up for the output losses that will happen during the second half of August to early September.

A number of companies in Shanghai and Ningbo have been ordered to shut or reduce operations prior to, and during the G20 summit that will be held in Hangzhou in early September in order to improve air quality.

Focus article by Felicia Loo

Additional reporting by Yeow Peilin

Top image: Sinopec refinery in Qingdao, China (Source: Sipa Asia/REX/Shutterstock)