Coronavirus impact haunts Asian light ends, costly naphtha could turn petchem makers to LPG

Singapore — Asia's gasoline and LPG markets are focused this week on the impact of the coronavirus outbreak on demand and production, while naphtha is expected to get support from tight supply of light naphtha, trade sources said.

As the discount of LPG to naphtha steepens, some East Asian steam crackers are looking to use more LPG, they said.

LPG DISCOUNT TO NAPHTHA SHARPENS

Lower Middle East naphtha exports due to refinery maintenance pushed light naphtha prices higher, while the open arbitrage from Europe kept supply healthy for heavy full range naphtha, market sources said.

This strength is shown in the widening February/March Mean of Platts Japan naphtha swap timespread by 32.61% week on week to $15.25/mt at Friday's Asian close, Platts data showed.

Cash differentials for spot paraffinic naphtha were also up 16% week on week at plus $29/mt to benchmark MOPJ naphtha physical assessments, on a CFR Japan basis, at Friday's Asian close.

However, falling freight rates were weighing on trade sentiment for cargoes from the Middle East and India, as the key LR1 Persian Gulf-Japan freight was down w38 in two weeks to w95 Friday, and the MR WC India-Japan freight was down w30 in two weeks to w120 Friday, Platts data show.

In addition, while steam crackers had originally considered ramping up run rates in February due to improved petrochemical margins, the coronavirus outbreak has disrupted China's petrochemical sector and could dampen demand, market sources said.

WORRIES OVER IMPACT OF CORONAVIRUS

Even as LPG buying activity is expected to recover this week as Chinese buyers return from the week-long Lunar New Year holidays, markets will remain cautious about the impact of the coronavirus, sources said.

Production could also be hit at propane dehydrogenation plants, as travel restrictions were placed in many Chinese cities and hampered workers' movements, market sources added.

CFR North Asian physical propane for H2 February delivery cargoes have been pressured by the recent slowdown in Chinese demand, down to a four-month low of $419/mt on Friday, Platts data showed.

As the discount of the February Far East Index propane and MOPJ naphtha swaps has steepened to four-month lows of $90.25/mt Friday, LPG has become a viable alternate petrochemical feedstock, and could prompt petrochemical makers such as Taiwan's Formosa Petrochemical Corp. to consider issuing a spot import tender if the discount remains deep for March, a market source said.

But the Middle East market is expected to stay supported on healthy demand for evenly split LPG cargoes from India.

State-run Indian Oil Corp, is seeking a 44,000 mt to 45,000 mt evenly split LPG cargo for March delivery by tender, which closes on February 6.

A dearth of butane, especially from the West, is widening the premium of butane to propane for March cargoes to $60/mt from $40/mt for February and is helping to keep prices of split cargoes supported, traders said.

Some market participants remain cautiously optimistic that high Chinese tariffs on US LPG imports could be removed for March-loading cargoes following the first phase of the US-China trade deal, limiting demand for alternative cargoes from the Middle East and pushing down FOB prices, though no confirmation from China is seen yet.

HOPES THAT VIRUS IMPACT COULD BE SHORT-LIVED

Gasoline traders are still debating the negative extent of the coronavirus outbreak on market fundamentals, amid anticipation of more Chinese supply emerging for end-February and early-March.

"We have to wait for the Chinese to come back to work. Whatever gasoline that could not be sold domestically could very well be shipped out and added to the already heavy regional supply pool," one market participant said.

Another source said: "The impact could be short term, once it seems that the spread of the infection has stabilized, the market will return to balance."

Whatever the duration of impact, market participants agreed that additional export barrels from China will keep Asia inundated with motor fuel and inject further downward pressure on the Asian gasoline complex, given that inventory levels have stayed high since last December.

Singapore light distillate stocks reached a near eight-month high in the week ended January 29 at 13.06 million barrels, according to Enterprise Singapore data.

Still, support from the West will likely cushion any sharp fall in crack spreads, especially as the USGC refiners prepare their facilities for the start of producing summer grade gasoline.

The FOB Singapore 92 RON gasoline crack against front-month ICE Brent crude futures fell to an average of $4.17/b over January 28-31, down from the $4.52/b average assessed a week earlier, S&P Global Platts data showed.