Naphtha bucks downtrend in India as medical hardware fly off the shelves

Singapore — The rush to produce medical-related plastics and hardware in the battle against COVID-19 has not only helped India's naphtha demand to buck the negative growth trend seen for the bulk of the oil barrel, it has led to the oil product posting a near double-digit growth so far this year.

With rising demand for medical plastics and other equipment, analysts said it has created a dramatic surge in demand for naphtha from petrochemical makers, helping to more than offset the fall in industrial petrochemicals demand.

In addition, the recovery in demand from the gasoline pool in recent months following the end of the countrywide lockdown has also helped India's naphtha demand in the January-July period reach 8.44 million mt, up 9.8% year on year, recent data from Petroleum Planning and Analysis showed.

"In the year so far, overall petrochemicals demand remained relatively firm due to the increase in demand for medical applications, food packaging and certain consumer and medical-related plastics," said Eshwar Yennigala, senior petrochemicals analyst at S&P Global Platts Analytics.

"The switch to new gasoline standards in 2020 has also indirectly boosted demand for naphtha into the gasoline pool."

Demand Hits Four-Month High

India's naphtha consumption in July rose for the third straight month to a four-month high of 1.284 million mt. Although consumption was 10% higher month on month, it was 12.4% lower year on year, PPAC data showed.

The CFR Northeast Asia ethylene spread against CFR Japan naphtha rebounded strongly around mid-May, with the spread remaining above the $300/mt mark since then, S&P Global Platts data showed.

As domestic Indian demand shows signs of robust growth, refiners have been offering less number of cargoes for exports, a trend analysts said is likely to continue.

"The use of single-use medical plastics have gone up substantially in India," said Amrita Sen, chief oil analyst at Energy Aspects. "In addition, the start-up of some units have helped to keep naphtha demand strong in India."

Nearly two-thirds of naphtha produced in India is used for gasoline blending followed by the petrochemical industry, which is growing at a robust rate.

Analysts expect India's petrochemicals industry's annual growth to remain above the annual GDP growth rate over the next decade.

While India's naphtha demand is set to soar because of growing appetite for the product from the transportation sector, rising demand for olefins and polyolefins in various industrial and electrical sectors will also aid growth, analysts said.

Amid a backdrop of rising domestic naphtha demand and low production due to reduced refinery runs, India's naphtha exports have remained low in June and July. Naphtha exports in June hit an 11-month low of 439,853 mt, according to PPAC data.

"Naptha exports hitting 11-month lows is further indicative of the fact that domestic demand growth will remain robust," Yennigala of Platts Analytics said.

Eyes on Crude Run Cuts

Indian refiners sold 155,000 mt of June-loading naphtha through public tenders. Sale of July-loading naphtha via public tenders was even lower at 119,000 mt.

However, there is a pick-up in sales of August-loading cargoes offered through public tenders as refiners gradually ramped up operations in July before planning to cut runs again. For August loadings, around 262,000 mt have been sold until now via public tenders.

With signs of rising regional supply, the C+F Japan naphtha cash differential had fallen to minus $2/mt at the Asian close Aug. 13, from plus $20/mt a month ago on July 13, Platts data showed. The differential picked up slightly to stand at minus $1.50/mt Aug. 14, amid robust buying demand from Asian steam cracker operators.

Hopes that India's oil demand will recover in the second-half of the year is fading fast as states implement partial lockdowns to battle the coronavirus pandemic, prompting refiners to start planning for lower crude runs for the rest of the year to prevent a problem of plenty at home.

Government officials and analysts expect India, one of the fastest-growing oil markets in Asia, will end 2020 with negative oil demand growth, a trend not seen for nearly two decades.

The last time India witnessed negative growth in oil demand was in 2001 when consumption fell marginally from 2000 levels.

According to Platts Analytics, India's oil demand is expected to fall 115,000 b/d year on year in H2, and whole-year demand will be down 405,000 b/d from 2019.