Asia naphtha to head south on supply glut, weak demand

SINGAPORE (ICIS)–Asia’s naphtha prices are poised to weaken further after crack spread valuations tumbled to over four-year lows, as the market struggles to cope with bloated supply and tepid demand, traders said on Monday.

“The [naphtha] market is so weak. It is bearish with so much supply available,” said one trader.

At midday, second-half September open-spec naphtha stood at $355.50-357.50/tonne CFR (cost and freight) Japan. The $12/tonne gain from 5 August was largely attributed to strong pre-holiday trades in Singapore.

Singapore, which is an oil trading hub in Asia, would be closed for a public holiday on 9 August.

But naphtha’s crack spread valuations versus Brent crude have plummeted and the intermonth and swaps spread were mired in the negative territory.

At the close of trade on 5 August, the second-half September naphtha crack spread was at $14.88/tonne – a 46% slump from the previous day and the weakest since 14 June 2012, when the crack spread was assessed at $8.05/tonne, according to ICIS data.

Meanwhile, in the forward market curve, the swaps spread between October and November were assessed at a $5.00/tonne contango on 5 August, widening from a $4.00/tonne contango in the previous reporting week.

The intermonth spread between the second-half September open-spec contract and the second-half October open-spec contract was assessed unchanged at a contango of $7.00/tonne on 5 August, based on ICIS data.

The intermonth spread between the first-half October contract and the first-half November was assessed at a contango of $7.00/tonne over the same period, similar to the previous reporting week.

During the week ended 29 July, the intermonth spread between the first-half September contract and the first-half October contract was assessed at a contango of $7.00/tonne on 29 July, compared with a contango of $4.00/tonne the previous reporting week and the weakest recorded since 11 November 2014.

The region’s naphtha market is facing immense pressure from a burgeoning pool of supply not just from deep-sea imports but also from increased spot volumes from the Middle East, as term buyers preferred not to lock in term contracts at a time of falling prices.

Asia is expected to receive some 1.1m tonnes of deep-sea naphtha supply from the west in September, up from 900,000 tonnes in August, according to traders.

A recent brief opening of the arbitrage window had enabled the economics to work, supporting bookings of such cross-regional fixtures at a time of weak naphtha demand in Europe, they said.

In July, deep-sea arbitrage naphtha inflows to Asia were estimated at 1.1m tonnes versus June’s 1.5m tonnes. 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.

Meanwhile, naphtha exports from Indian refiners to Asia are building up while refineries in Japan and China are running at somewhat healthy rates, the traders said.

There is also a greater pool of light naphtha supply owing to a higher usage of condensate feedstock in splitters, they added.

Demand on the other hand, was declining amid peak cracker turnarounds, prompting recent spot trades and tenders to draw weaker price differentials in reflection of the market bearishness, the traders said.

In Japan, JX Nippon Oil & Energy has taken its Kawasaki cracker off line on 2 August for planned maintenance, a company source said.

The facility, which has an ethylene capacity of 460,000 tonnes/year, is scheduled to resume operations on 28 September, according to the source.

The shutdown is expected to worsen the supply tightness in Japan, where a technical issue disrupted Asahi Kasei Mitsubishi Chemical Ethylene Corp’s operations at its 570,000 tonne/year facility in Mizushima.

In Taiwan, Formosa Petrochemical Corp (FPCC) has shut its 1.03m tonne/year No 2 cracker in Mailiao on 29 July for a turnaround, three days earlier than planned, a company source said on 2 August.

The company is aiming to resume operations before 20 September, the source said.

FPCC’s two other crackers – a 700,000 tonnes/year and a 1.2m tonne/year unit – are running the full capacity.

Downstream, ethylene import prices in Asia are weighed down by a large inflow competitively priced Iranian supply, although losses are capped by recent production issues at several regional crackers.

On 5 August, ethylene prices fell by $20/tonne at the low end to $1,060-1,125/tonne CFR NE Asia, compared with $1,100-1,150/tonne CFR NE Asia four weeks ago, ICIS data showed.

Rare ethylene exports from Iran – the first since western sanctions were lifted under an international nuclear deal – are said to be linked to a recent accident at a major ethylene pipeline and possible downstream production issues.

Iranian shipments are traded at more competitive levels than regional tonnes as a number of companies are still hesitant to purchase cargoes from the country amid payment concerns.

The Iranian supply is contributing to an overall healthy level of exports from the Middle East.

Focus article by Felicia Loo

Additional reporting by Yeow Peilin

Top picture: Singapore port (Photographer: Charles Pertwee/REX/Shutterstock)