Asian naphtha, LPG set for Middle East tightness, higher US exports in 2020

Singapore — Petrochemical feedstock naphtha and LPG are poised for a boost amid supply tightness from the Middle East especially in the first half of 2020 on refinery turnarounds and lower LPG production, but higher exports from the US could plug the shortfall, industry sources said.

There are concerns that LPG exports from Iran could be curtailed amid ongoing tensions between the US and Iran, exacerbating tightness in the Middle East further. Iran has promised to retaliate against the US, or its interests, in response to the killing of Iranian General Qassem Soleimani in a US air strike in Baghdad on Thursday January 2.

US President Donald Trump over the weekend threatened further military action against Iran, should Tehran strike back as promised in response to the US killing of Soleimani.

MAINTENANCE TO LIMIT NAPHTHA SUPPLY

The Asian naphtha market expects maintenance to constrain supplies in the first-quarter and second-quarter, however tides are expected to turn as more US exports are slated for the second half of the year, market participants said.

"The naphtha market could stay strong past February -- in Q1 the Middle East will have a big turnaround program so the exports will not get back to the levels before the Saudi Arabia incidents in September. So supply will stay short unless more supplies become available from the West of Suez," a Singapore-based trader said.

Exports of US naphtha and LPG are set to rise due to the increase in NGL fractionation capacity in the country, providing more supply for the Asian market.

US exports of naphtha to North Asia hovers around 450,000 mt each month, market sources said.

"US naphtha exports are linked with LPG and we could see about 10% more naphtha exports [in 2020], but it won't go much more above 500,000 mt/month," a Singapore-based trader said.

"The petrochemical turnaround capacity will be lower in 2020 compared to 2019, so demand should be better, but refinery turnarounds will be lower in 2020 which means more supply of product, so it could balance out," a trader said.

End-users have also borne poor petrochemical margins in the recent months due to the start up of new Chinese plants in 2019, market sources said.

"The margins on petrochemicals are not as fancy as before so the market is not as strong compared to previous years. With the US exporting a lot of ethylene and a lot more capacity coming from petrochemical crackers and so forth, you have a lot of ethylene available in the market, and if you have an economy driver like China weakening that is not a good sign," a source with a Middle East producer said.

The pressure from poor margins saw Asian crackers mull run cuts, however naphtha demand has persisted as LPG has been comparatively pricey, sources said.

TIGHT LPG SUPPLY FROM THE GULF

LPG supply from the Middle East, which has been mainly taken by China via new and bigger term contracts to meet the rising number of propane dehydrogenation plants, as well as by India, would be limited by lower crude output and associated gas in 2020, following the decision by OPEC, Russia and its allies in December to steepen production cuts to 1.7 million b/d from 1.2 million b/d, with Saudi Arabia offering an extra 400,000 b/d in voluntary cuts starting January.

Lower Saudi oil production had led to cuts and delays in Saudi Aramco's acceptances of January loading term nominations, which together with delays by ADNOC and Qatar had sent Asian and Middle East LPG prices up to around one-year highs.

With no signs of an end to US sanctions, especially in light of the current tensions following the killing of Soleimani, Iranian supplies are also expected to remain scarce.

The LPG market will also see more diverse global cargo flows to meet growing demand from North Asian petrochemical makers led by China and South Korea, while India and Indonesia will see expanding demand from households.

LPG exports, which have already started from new terminals in Canada and Australia in 2019, are expected to continue to make their way to this region, trade sources said. China will remain keen to take cargoes from such new supply outlets -- including from West Africa -- as it is expected to continue to grapple with the uncertainty of US supply amid the ongoing trade tensions.

Recent propane export tenders by Canada's Altagas were reportedly won by Oriental Gas, trade sources said, enabling the Chinese PDH operator to assess North American supply and leverage freight savings due to the proximity of the 1.2 million mt/year Ridley Island terminal across the Pacific.

However, with growing optimism for a US-China trade deal, after US President Donald Trump said on December 24 that he and Chinese President Xi Jinping will have a signing ceremony for the phase-one trade deal that was agreed by the two countries earlier in December, the market would need to factor in the eventual return of US LPG into China.

Still, industry sources did not expect China's 26% tariff on US propane and 31% tariff on US butane imports to be removed soon, despite the progress made reaching the agreement to ink a phase one trade deal.

Before tariffs were imposed, China imported nearly 3.6 million mt of US LPG in 2017.

-- Wendy Cheong, wendy.cheong@spglobal.com

-- Wanda Wang, wanda.wang@spglobal.com

-- Ramthan Hussain, mohd.ramthan.hussain@spglobal.com

-- Edited by Norazlina Jumaat, newsdesk@spglobal.com