Asia naphtha strengthens on tight supply; backwardation widens

Author: Melanie Wee

2022/02/22

SINGAPORE (ICIS)--Asia’s naphtha prices extended gains to stay at multi-year highs on Tuesday, fuelled by rallying crude oil futures on the back of supply constraints.

The product’s intermonth spread for first-half April and first-half May widened to $25/tonne in backwardation, from $8/tonne a month earlier, with prompt-month prices notably higher than forward months - reflecting firm fundamentals.

This is the widest backwardation since December 2019.

At midday, open-specification naphtha indicative prices for first-half April delivery averaged at $895.00/tonne CFR (cost and freight) Japan, up $30/tonne from the previous day’s close.

Spot naphtha prices remain at highs near the $900/tonne levels since early September 2014, ICIS data shows.

At noon, ICE Brent crude oil futures surged above $97/bbl on the back of heightened tensions between Russia and Ukraine.

“Crude oil [prices] is the main issue … fundamentals are strong due to tight supply and a closed [west-east naphtha] arbitrage,” said a northeast Asia-based market source.

Increased naphtha demand for gasoline-blending in Europe is expected to curb naphtha flows into Asia, which may already be happening.

Compounding the tight supply scenario is the prospect of lesser overall supply from the Middle East amid refinery turnarounds.

The tight supply is overshadowing stable demand for naphtha in Asia, while downstream producers continue to monitor margins for olefins that remain squeezed.

Firm naphtha prices have surpassed liquefied petroleum gas (LPG) prices in Asia. But the wider spread was seen as marginal and yet to prompt a switch from naphtha as the preferred cracking feedstock.

Focus article by Melanie Wee

Additional reporting by Nurluqman Suratman