Asia naphtha crack spread deepens in negative zone; supply overhang

SINGAPORE (ICIS)–Asia naphtha’s crack spread sank into deeper negative territory on the back of ample supply, with greater flows expected arriving from the West, weighing on market fundamentals.

Naphtha’s crack spread to ICE Brent crude oil futures stood at -$60.13/tonne on 7 April, deepening the negative spread from the preceding day’s close at -$47.45/tonne and the lowest since 2008.

The product’s crack spread, a measure of its refining margin, slumped from $19.08/tonne on 31 March to -$23.60/tonne on 1 April, when spot naphtha prices dropped to their lowest in 19 years.

Weakness in oil prices amid ample supply and poor demand caused by the coronavirus pandemic has hurt naphtha market sentiment.

At afternoon session in Asia on Wednesday, ICE Brent crude oil futures were at $32.62/bbl after settling lower in the previous close.  However, market focus was on a potential agreement later in the week between OPEC and its allies on production cuts.

Asia naphtha markets grappled with looming supply from the Middle East as refineries in the region return from scheduled turnarounds.

Weak transport fuels consumption in Europe on the back of restrictions to travel and lockdowns chipped away at gasoline-blending demand for naphtha.

Consequently, excess supplies from northwest Europe and the Mediterranean are envisaged to be finding their way to Asia as a receiving outlet, at a time when petrochemical demand is downbeat amid cracker turnarounds.

An estimated near 2m tonnes of Western arbitrage naphtha, or possibly more could land in Asia next month, elevated from monthly average volumes at around 1.5-1.7m tonnes.

In a similar vein, weakness in aromatics markets in the US has led to the opening of the US-northeast Asia arbitrage window for mixed xylenes.

The weak market fundamentals were reflected in naphtha’s forward intermonth spread for 2H May and 2H June at a $7.00/tonne contango, in contrast with the $7.00/tonne backwardation a month earlier.

Spot naphtha CFR (cost and freight) Japan prices for second-half May delivery averaged at $190.00/tonne at midday session on Wednesday, down 39% from levels a month earlier at $311.00/tonne CFR Japan.

Focus article by Melanie Wee