Japan naphtha front-quarter time spread eyes July 2022 highs as backwardation steepens

Elevated near-term supply concerns in the past week, coupled with a bearish Q3 demand outlook, may likely push the Japan naphtha front-quarter time spread to its highest monthly average since July 2022, according to market participants.

At the March 19 Asian close, the Platts CFR Japan naphtha front-quarter Q2/Q3 derivative time spread was assessed at an average of $26.02/mt, month-to-date, widening 27.81% from February's full-month average of $20.36/mt, according to S&P Global Commodity Insights data.

The steepening backwardation could push the quarterly time spread towards its highest monthly average since July 2022, when China's reopening from pandemic-era restrictions lifted the time spread to an average of $28.20/mt, historical S&P Global data showed.

Strength in the Asian naphtha complex through the first quarter of 2024 appeared to continue into the second quarter amid supply-side concerns, though analysts warn that prices may come under pressure in the months thereafter.

Demand in the Asian naphtha market was supported by strong buying appetite from South Korean and Japanese end-users for H2 April and H1 May cargoes in the week of March 11-15.

Notably, the quarterly time spread, an indicator of medium-term sentiment, reached a 16-month high of $28.83/mt at the March 15 Asian close, S&P Global data showed.

The complex was further supported by supply tightness in Europe, with a Singapore-based trader emphasizing "an estimated 50% drop in naphtha exports [from Russia]" due to drone attacks on Russian refineries.

The trader added that the market had already priced in the impact and end-users were seen purchasing cargoes for H1 May early on concerns that cash differentials might go higher.

Naphtha demand seen easing

Demand for naphtha as a steam cracking feedstock is projected to decline on the back of the forthcoming cracker maintenance season, leading to the steeper backwardation observed in the quarterly time spreads.

Furthermore, the Asia ethylene-naphtha spread continued to narrow, casting a shadow on planned steam cracker operating rates in April. "The increase in run rates by South Korean crackers [in March] is not sustainable as the petrochemicals industry as a whole is not doing well generally," a source said.

The CFR Northeast Asia ethylene spread to C+F Japan naphtha physical narrowed to $204.5/mt at the Asian close March 19, from $251.50/mt Feb. 29, S&P Global data showed.

The spread fell below the typical breakeven level of $250/mt for integrated producers and the breakeven level of $300-$350/mt for non-integrated producers.

Demand for naphtha as a gasoline blendstock is anticipated to remain firm in the lead up to the US summer driving season, but is expected to taper off in the latter half of Q3.