Naphtha supply set to decrease in Asia as refiners shy away from light crude

Singapore — The Asian naphtha market is set to see supply contract as refiners shy away from using light crude grades and pare back operating rates, adding to the challenges being thrown up by logistical and economic issues caused by the coronavirus pandemic, market sources said this week.

"Some refiners are trying not to buy light crudes and use medium and heavy crudes, and lighter crudes produce more naphtha and light ends products," a trader with a Middle Eastern producer said.

Light crude grades and condensates are already grappling with a dearth of demand from Asian end-users amid continuing run cuts, sources said.

Australia's North West Shelf condensate still has unsold barrels from its May loading program, while its June loading cargoes are yet to trade in the spot market, traders said.

Qatar Petroleum's low sulfur and deodorized field condensates have also received no bids recently from Asian end-users, which have cut runs or opted for cheaper alternatives like naphtha or lighter crudes, sources said.

"The usual refiners that pick up DFC/LSC did not participate in the tender this time," a crude trader from Singapore said.

RECORD LOW CRACKS

Run rates in most Asian refineries are down amid poor demand for end products, particularly jet fuel and gasoline, sources said.

"Europe and US have loaded down refineries and in the East of Suez there are refineries that have loaded down quite substantially, by 30%-50%," a Singapore-based naphtha trader said.

The M2 Jet fuel crack against Dubai swap fell to a record low of minus $1.65/b Tuesday, while the M2 gasoil crack against Dubai swap fell to a 17-year low of $5.08/b, S&P Global Platts data showed.

"No one is looking to buy the light grades currently," said another Singapore-based crude trader, adding that sellers have few options but to store the crude instead.

Market participants said there was less interest in light products due to the global oversupply, and refiners were eyeing the better earnings and demand for fuel oil.

"One of the best performing cracks is fuel oil, so it makes sense to process the heavier crude grades to produce more fuel oil, which has more demand from fewer idling vessels," a Singapore-based naphtha trader said.

POCKET OF DEMAND

Bucking the trend, naphtha-fed steam crackers in North Asia have held onto high run rates as petrochemical margins have remained positive and naphtha feedstock prices were at bargain levels, however end-users remain cautious as downstream demand was expected to decline due to the global COVID-19 lockdowns, market sources said.

The M2 Naphtha crack against Dubai swap rose to a month-to-date high of minus $8.95/b on Tuesday, Platts data showed.

"Global demand has decreased by a lot more than what OPEC decided to cut in production -- overall worldwide demand was 100 million b/d so a 20 million b/d decrease means refinery runs reduced by 20%, but petrochemical margins are not bad so most plants are running at 100% - so aside from the lack of gasoline blending demand, naphtha should be tight," a source with a North Asian naphtha end-user said.

Many North Asian steam crackers have maintained run rates in April at 95%-100% of capacity and were planning to maintain current levels for May, even as the downstream market looked softer for May and June, market sources said.