Tight spot supply, healthy naphtha cracks to support Australia's Sep NWS condensate

Singapore — Price differentials for the September loading program of Australia's North West Shelf condensate is expected to be supported by tighter supply and improved product margins, market sources said July 9.

For the September loading program, there are three 650,000-barrel cargoes of NWS -- one held by Mitsui for loading over September 1-5 and two by BP for loading over September 11-15 and September 23-27, according to market information gathered by Platts.

This compares with the four cargoes for the August loading program, which traded at around minus $1-$1.50/b to Platts Dated Brent on a FOB basis.

"There is less supply of condensate in the market," a Singapore-based trader said, adding that this could provide support to the price differentials of September-loading condensate cargoes.

The recent strength in naphtha crack spreads -- one of the main products from condensates -- is another bullish factor likely to support condensate values going forward, traders said.

The second-month Mean of Platts Japan naphtha swap crack against Dubai crude swap touched a two-year high of minus 22 cents/b on July 7, which compares with the average crack spread of minus $2.40/b in June, Platts data showed.

Naphtha end-users in Asia have faced increasingly tight supply since the July delivery cycle, which pushed cash premiums to a near 5-month high on July 7, at a time when most steam crackers are operating at full capacity due to the positive olefin margins.

On July 8, the cash differential for spot paraffinic naphtha parcels was assessed at plus $25/mt, stable on the day, against benchmark MOPJ naphtha physical assessments on a CFR Japan basis, Platts data showed. The premium was last at this level on February 11.

Naphtha supply was tight as fewer spot cargoes were available from the Middle East, India and via arbitrage from the West. Furthermore, end-users were receiving fewer volumes domestically due to refinery run cuts and the strong pull for naphtha into the gasoline blending pool as gasoline demand is on the recovery, market sources said.

"Strong naphtha and crude supporting [condensate values]," a Singapore-based condensate trader, who expects the NWS price differential for the September loading cycle to be at a premium against Platts Dated Brent values .

NWS price differentials have picked up since June, after falling to record lows in May, on the back of improving light distillate margins, higher light crude prices and demand from other Asian regions, traders said.

WEAK PETROCHEMICAL MARGINS, INDONESIAN DEMAND

However, some downside risks remain, particularly since the main importer of this grade, Indonesia's Pertamina, continues to sit on the sidelines, traders said.

Pertamina, which buys condensate on behalf of its subsidiary, Trans Pacific Petrochemical Indotama, a regular buyer of Australia's North West Shelf condensate, has not bought spot NWS since May as the coronavirus pandemic took a hit on demand, market sources said. TPPI runs Indonesia's sole 100,000 b/d splitter in Tuban.

"Currently there is still inventory and refinery capacity is not running at its fullest. So no spot requirement at least until October, " a source close to the company told Platts in early July.

In late April, Pertamina said it was not looking to purchase spot condensates until the third quarter of 2020, but this has now been pushed to October 2020, sources said.

Splitters typically use condensate grades or heavy full range naphtha grades as feedstock, and have been plagued with poor earnings not only from the lack of jet fuel demand since the coronavirus outbreak, but also from poor paraxylene margins. Splitters produce a range of refined products including light gases, LPG, light and heavy naphthas, middle distillates and atmospheric residue -- the naphtha is used to produce paraxylene at integrated aromatic units.

The spread between CFR Taiwan/China paraxylene marker over CFR Japan naphtha physical assessments was at $141.50/mt at the Asian close on July 8, down $2/mt day on day, Platts data showed. This is under the typical breakeven level of around $280-$300/mt for non-integrated producers.

The weak earnings from downstream aromatics has significantly impacted splitter margins since mid-April, which has in turn curbed the demand for condensates.

"Mainly poor PX margins have forced splitters to reduce runs and now the average splitter run rate is around 80%," a South Korean naphtha end-user said.