Analysis: Asian condensates ride up supported by higher crude, naphtha

Singapore — Price differentials for August-loading condensates traded higher month on month, finding support from higher crude prices and stronger naphtha margins, market sources told S&P Global Platts.

"Condensate is one substitute for light crude for refineries, so refineries try to take more condensates than light crude because of high price differentials of light crude," a South Korean end-user said.

"In line with strength of light crude, the condensate price differentials are also going up, " the source added.

The recent strength of condensate grades was attributed to lighter crudes being more expensive after Saudi Aramco increased its official selling prices for July loading crudes coming into Asia, as well as better margins for light distillates gasoline and naphtha, market sources said.

A 650,000-barrel of Australia's North West Shelf condensate loading August 6-10 was sold by Chevron to an Asian end-user at a discount of around $1/b to Platts Dated Brent on a FOB basis, traders said. Previously, BHP had sold an August loading NWS to a trading house at a discount of around $3/b to Platts Dated Brent on a FOB basis.

In comparison, July loading NWS cargoes had traded close to discounts of around $9-$10/b to Platts Dated Brent on a FOB basis, market sources said.

In June, Australia's Kutubu Light crude had also traded higher compared with May, market sources said. A 500,000-barrel of Kutubu Light crude for August loading traded at discounts of around $1/b to Platts Dated Brent on an FOB basis as compared with discounts of around $7/b for the cargoes loading in July, market sources said.

IMPROVING PRODUCT MARGINS

Market sources pointed to improving margins for products including naphtha and gasoline as providing support to condensates and light crude grades.

The second-month naphtha crack spread against Dubai swap averaged minus $10.13/b and minus $6.7/b in April and May, respectively, and has so far averaged minus $2.96/b in June, Platts data showed. The second-month gasoline crack against Dubai swap averaged minus $5.01/b and 34 cents/b in April and May, respectively, and has so far averaged $2.63/b in June.

Moreover, with countries in the process of easing coronavirus-related lockdown measures, economies are expected to recover, and with it demand for transportation fuels, market sources said.

"Margins for splitters are being squeezed, but no one wants to cut runs because the countries are starting to open up. So, they need to ramp up, and sellers know it so they push up the marks," a Singapore-based condensate trader said.

Trade sources said poor aromatics margins had also hurt splitters' bottom lines.

"Condensate is not cheap anymore, and neither is naphtha, so I wonder how are splitters going to manage," the trader added.

The Asian naphtha complex had strengthened on tighter supply, particularly since the H2 July delivery cycle, and the supply-side pressure continued into the current H1 August delivery cycle, market sources said.

The firm naphtha market has pushed splitters to prefer condensate feedstock, market sources said.

"Splitters are trying to get condensate as much as possible because naphtha cracks are high, which makes naphtha more expensive than condensate," an end-user said.

Reflecting firmer sentiment, the CFR Japan naphtha physical cracks against front-month ICE Brent crude futures has risen to an 8-week high of $59.85/mt at the Asian close on June 1, up $2.10/mt day on day, Platts data showed. The physical crack was last higher on April 23 at $66.80/mt, Platts data showed.

Demand for cracker-feed naphtha from the Far East petrochemical production hub was firm, market sources said, as most steam crackers were operating at full or close to full capacity due to favorable olefin margins.

On the supply-side, naphtha buyers were reportedly struggling to secure paraffinic naphtha suitable for cracker feedstock, on the back of both lower arbitrage supply of light naphtha grades and lower refinery production in the East of Suez, market sources said.

"More petrochemical activity is coming back up and ethylene margins are doing good so that's why naphtha went up," a Singapore-based trader said.

The spread between CFR Northeast Asia ethylene and CFR Japan naphtha physical was $474.625/mt at the June 18 Asian close, up $1.25/mt on the day. This is above the typical breakeven spread of $350/mt for non-integrated producers, and $250/mt for integrated producers, Platts data showed.