Asia naphtha seen buoyant on firm crude but fundamentals weak

Focus story by Felicia Loo

SINGAPORE (ICIS)–Asia’s naphtha prices will be underpinned by strong global crude futures, but the market’s supply-demand fundamentals are weak, traders said on Friday.

At midday, open-spec first-half August prices stood at $989.50-992.50/tonne CFR (cost and freight) Japan, up by $4.50-5.50/tonne from Thursday, on the back of overnight gains in crude market, according to ICIS data.

Ongoing fighting in oil-rich Iraq and concerns about possible supply disruptions provided impetus to overall firmer crude values.

Crude prices were also supported by a positive assessment of the US economy by the Federal Reserve this week.

“It’s all crude-driven,” said one trader, adding the fundamentals in the Asian naphtha market remained stable-to-soft, as the region is a bit long in supply of the petrochemical feedstock.

In a sign of weak fundamentals, the spread between the first-half August and the first-half September contracts narrowed to $9.50/tonne in backwardation on 19 June from a backwardation of $10.00/tonne on 18 June, ICIS data showed.

The $9.50/tonne spread was the lowest since 11 March, when the intermonth spread was pegged at $9.25/tonne in backwardation, it indicated.

On 19 June, naphtha crack spread against August Brent crude futures dwindled to $129.50/tonne – the weakest levels since 4 June when the crack spread stood at $123.98/tonne, ICIS data showed.

“The fact that the spreads are coming off shows weaker fundamentals,” said one trader.

Undermining the market was a slew of issues, including rising splitter naphtha supply, as well as firm arbitrage volumes, and most importantly, a major cracker turnaround in the region, the traders said.

Taiwan’s Formosa Petrochemical Corp (FPCC) will shut its 1.2m tonne/year No 3 cracker in Mailiao in mid-August for maintenance, which will last 40-45 days.

Meanwhile, the arbitrage window to pull in European naphtha barrels is closed for now, but opportunities to draw US naphtha supply remain available, the traders said.

Around 1.2m tonnes of deep-sea inflows from northwest Europe, the Mediterranean, Russia and the US will be bound for the East of Suez in July, they said.

On the demand front, the spot buying has been mellow this week as most of the cracker operators would have already covered their requirements.

With the persistently high outright prices, the petrochemical margin is also being dampened, the traders said.

On 19 June, ethylene prices stood at $1,450-1,460/tonne CFR NE (northeast) Asia, up by $10/tonne at the low end the price range four weeks ago, ICIS data showed.

Higher naphtha prices had prompted suppliers to raise their ethylene pricing ideas.

Read John Richardson and Malini Hariharan’s blog – Asian Chemical Connections