Asia naphtha’s crack spread turns negative on bearish outlook

Author: Melanie Wee


SINGAPORE (ICIS)--Asia naphtha prices are languishing at 18-year lows while the product’s crack spread, a measure of its refining margin, has fallen to negative territory amid bearish market conditions.

Spot CFR (cost & freight) Japan naphtha prices for first-half May delivery averaged at $207.00/tonne at early hours session on Wednesday, rising by a modest $7.50/tonne from the preceding day’s close, albeit still at lows not seen since 2002.

Naphtha’s crack spread against prompt-month ICE Brent crude oil futures closed at negative $9.00/tonne as of 24 March, the lowest since June 2019.

Asia naphtha prices have already fallen by 60% since the start of the year at above $500/tonne CFR Japan, ICIS data shows.

Highly volatile crude oil futures against a backdrop of geopolitical tensions between Saudi Arabia and Russia, combined with uncertainty stemming from the coronavirus pandemic threatening global demand, dented market sentiment for naphtha.

High volatility in crude oil markets has also resulted in greater uncertainty in aromatics sectors.

ICE Brent May crude oil futures stood at $27.68/bbl at early hours session on Wednesday in Asia, following modest gains overnight.

However, increasing lockdowns across the world heightened worries on global fuel demand.

This is further exacerbated by weakness in gasoline markets, which typically draws naphtha used for blending purposes.

“Supply (flows) are likely to improve … there could be more western arbitrage flows [to Asia]”, said a Singapore-based market source.

Refinery turnarounds in the first quarter ending in the Middle East is expected to free up supply of naphtha, which does not bode well in the current bleak market climate.

Although there are pockets of northeast Asia naphtha demand for petrochemical production, it appears not enough to alleviate the bearish conditions.

Reflecting the weak market sentiment further down the forward market curve, the intermonth time-spread between 2H May and 2H June stood at a contango of $0.75/tonne. The same spread was at a backwardation of $2.50/tonne on 24 March.

Focus article by Melanie Wee