OUTLOOK ’18: Asia naphtha poised for upside on firm petchem demand

Source: ICIS News

2017/12/29

SINGAPORE (ICIS)--Asia naphtha markets are set to stay supported by firm regional demand for petrochemical production, even as deep-sea transatlantic supplies remain relatively consistent.

Robust spot demand has underpinned Asia naphtha markets and could prevail moving into the new year, against a backdrop of strong gains in global crude oil futures.

Mandatory Credit: Photo by Alexander Poschel/imageBROKER/REX/ShutterstockOil tanker

Spot naphtha prices on a CFR (cost and freight) Japan basis have chalked up considerable gains in the past month, driven by robust buying activity by downstream petrochemical producers.

This is particularly evident in healthy spot naphtha purchases for January and February delivery, keeping spot differentials at premiums as opposed to discounts fetched for cargoes at the end of 2016.

Underscoring the firm market mood, Asia’s naphtha forward time spread has remained at a wide backwardation.

A market in backwardation typically reflects strong fundamentals, where prompt month prices are higher than forward months.

In contrast, the market was largely languishing at a contango towards the end of 2016, when the market was awash with surplus supply.

On 15 December 2017, the forward intermonth time spread between the second half of January and the second half of February was assessed at a backwardation of $11.50/tonne, wider than the spread of $10.50/tonne during the same period a month earlier, on 15 November.

In related crude oil markets, sharp gains in the week ended 15 December following technical issues at a Forties pipeline in the North Sea boosted the market as a whole.

Asia’s naphtha crack spread versus February ICE Brent crude futures was at $121.28/tonne on 15 December, up from levels at $116.95/tonne on 1 December, according to ICIS data.

In contrast, naphtha’s crack spread was well below this level at below $70/tonne on 15 December 2016.

By and large, a majority of cracking facilities in parts of northeast Asia are running at full or optimum capacity amid healthy downstream ethylene demand.

“We are still running at full capacity because demand and [olefins] margins are good,” said a northeast Asia-based market source.

With cracker expansions on track for some producers, this may mean positive upside against a backdrop of healthy petrochemicals demand.

As of 15 December, naphtha-based ethylene margins in northeast Asia stood at $612/tonne, climbing by some 10% from the preceding week.

Moreover, less availability of cheaper alternative feedstock liquefied petroleum gas (LPG) may mean a greater dependence on naphtha in the near term if not already, according to industry sources.

The generally healthy demand appears to be negating steady deep-sea arbitrage flows from the west.

Arbitrage supply flows of around 1.2m tonnes are estimated to arrive in December, steady from levels estimated in November, according to traders.

In India, Bharat Petroleum Corp Ltd (BPCL) is understood to have raised capacity at its 190,000 bbl/day Kochi refinery to 310,000 bbl/day this year, in line with its plan, according to a source familiar with the matter.

Consumption of naphtha in China has been healthy.

China imported 467,418 tonnes of naphtha in October, rising 38% from the same period a year earlier, according to Customs data.

Positive economic data in China also helped to cushion market sentiment. China’s manufacturing purchasing managers’ index (PMI) rose to 51.8 in November, up from 51.6 in October, latest official data showed.

The PMI is a barometer of an economy’s manufacturing activities, with a reading of 50 or higher indicating an expansion, while a number below that denotes a contraction.

Commodities trader Trafigura attributed the boost in demand for naphtha in recent months partly to costly LPG prices, according to its 2017 annual report.

“A spike in propane prices caused a structural shift in global petrochemical demand in favour of naphtha,” said José Larocca, Head of Oil and Petroleum Products Trading at Trafigura.

“We see difficult conditions continuing in the short term, but we believe the supply-demand balance should start to tighten significantly during 2018 given continuing robust growth in demand, [and] the global drawdown in stocks as a result of OPEC’s production curbs.”

Outlook article by Melanie Wee