Asia gasoline to be driven by US supply tightness but naphtha hit by cracker run cuts

Asian gasoline is set to be driven by supply tightness in the region and the US this week despite demand destruction due to the coronavirus outbreak, while naphtha is expected to sag on waning end-user demand, market sources said Monday.

As for the other light end product, LPG, traders are keeping an eye on Saudi Aramco's acceptance of March term nominations, which will set the tone on Middle Eastern trading.

GASOLINE DRIVEN BY US STRENGTH

A combination of US supply-driven bullishness and more refinery run rate cuts in China will provide further support to Asian gasoline this week, with market participants focusing on the US gasoline inventory data to be released mid-week, for signs of a possible drawdown due to unplanned outages at major US refineries.

The outage at Phillips 66's gasoline-making FCC in its 258,000 b/d Bayway refinery in Linden, New Jersey, is poised to tighten supply in the US Atlantic Coast, providing a boost to the US NYMEX RBOB futures contract, which will in turn further underpin Asian cracks, sources added.

The physical FOB Singapore 92 RON gasoline crack against front-month ICE Brent crude averaged $8.64/b last week, climbing up 18.52% from the $7.29/b average a week earlier, Platts data showed.

Meanwhile, refiners in China have cut crude throughput in January and are making more cutbacks in February, S&P Global Platts reported earlier. Reduced supply and logistics concerns have slowed down gasoline exports from China.

Japanese refineries over February 2-8 had also cut runs by 3.6% from the week before, according to latest data from the Petroleum Association of Japan.

Traders, however, expect the coronavirus to cap gasoline demand, as construction, manufacturing and transportation activities screech to a halt across major regional economies.

STEAM CRACKER RUN RATE CUTS EYED

The Asian naphtha market will keep an eye on further steam cracker run rate cuts this week, on the back of lower downstream demand from China and weakening petrochemical margins, with some crackers already implementing run cuts, market sources said. This is expected to lower demand for naphtha feedstock.

"Demand for naphtha is less, crackers are cutting run rates a bit too," a Middle East producer said.

Steam cracker operators are expected to buy more LPG feedstock for March due to its deep discount to naphtha, and with ample supply of European arbitrage naphtha cargoes arriving in Asia in March, cash differentials have fallen to a one-month low.

The CFR Korea spot cash differential for naphtha with minimum 70% paraffin was assessed at plus $19/mt on Friday, down $5/mt on the week, reflecting a recent spot purchase by South Korea's Yeochun Naphtha Cracking Center for H2 March delivery at that level, market sources said.

Traders expect the FOB Arab Gulf cash differential to slide further this week, as more spot cargoes are being offered out of the Middle East, adding to supply in the East of Suez market .

This comes at a time when South Korean naphtha sellers are concerned they would have to decrease exports to China due to the coronavirus outbreak.

Reflecting the weakness, the March/April Mean of Platts Japan naphtha swaps backwardation narrowed by $2.75/mt day on day to $6.75/mt at Friday's Asian close.

SAUDI MARCH ACCEPTANCE TO SET LPG TONE

Asia's LPG market will look out for Saudi Aramco's acceptances of March-loading term nominations for signs of any impact further OPEC oil cuts would have on Middle East LPG supplies, though some sources said such reductions by the group would have already been factored in.

So far, ADNOC and Qatar have announced no cuts for March, though some moderate loading delays had slightly widened the backwardation last week. But the backwardation has started to narrow recently on nagging concerns over slowing Chinese petrochemical and retail demand for LPG due to the coronavirus scare.

This comes even as Western arrivals are expected to be steady in March.

Traders also expect a slight demand pick-up in China this week, though some fear that buyers would continue to delay purchases.

Traders expect FOB Middle East differentials to hover at low single-digit premiums.

Some demand has emerged from Japan and South Korea, as CFR prices lag FOB Middle East levels, indicating healthy Western supply.

But Taiwan's appetite for cheap LPG has yet to be seen. CFR North Asia propane prices have recovered from recent lows, though remain subdued below $400/mt. Differentials have shown recovery, though are expected to stay at low double-digit discounts to the contract price.

Steady supply of propane slated for March arrivals from the US will also weigh down propane prices, though some Middle East spot mixed cargoes offered could help to narrow the wide premiums above propane that has been seen in recent weeks.