LPG premium to naphtha widest in four months on winter demand, US supply woes

Singapore — Prices of both naphtha and LPG are strengthening in Asia but with US hurricanes delaying shipments to meet regional demand recovery, LPG has been rising faster since turning to a premium against naphtha about a week ago, S&P Global Platts data showed.

The November Argus FEI propane swap premium to the Mean of Platts Japan naphtha assessments widened by $2/mt day on day to $11.25/mt on Oct. 5, Platts data showed. Propane flipped to a premium level Sept. 30 after being in discounts since June 5.

The premium of CFR North Asia propane versus C+F Japan naphtha also reached multi-month highs of $7.50/mt on Oct. 5. The premium was last wider on June 1 at $13.375/mt, Platts data showed.

Asia was slated to receive some 2.1 million mt of LPG from the US in October, but according to rough estimates about 20 VLGCs were delayed by the Houston Shipping Channel closure from Sept. 20-23, followed by port delays till at least Oct. 2, trade sources said.

While the rallying Asian LPG market has improved arbitrage economics for US cargoes, traders estimate November deliveries to the East limited to 1.95 million mt.

Supply from the Middle East has been mixed, with Qatar keeping acceptances for October in line with nominations and had advanced dates for some cargoes loading in November, while also selling spot cargoes for October.

ADNOC's November-loading acceptances are due in the week of Oct. 4 after it had announced October acceptances without cuts and delays, while advancing some loading dates.

Kuwait has also been regularly offering and selling cargoes in recent months, but Saudi Aramco canceled about three term cargoes for October loading as traders await their November acceptances in the week of Oct. 11.

Regional LPG demand is supported by forecasts of a harsh winter in North Asia, as well as a recovery in China and India, which drove CFR North Asia propane to $399.5/mt on Oct. 5, while CFR North Asia butane was at $407.5/mt, both around seven-month highs, Platts data showed. Such purchases have bolstered inventory across Asia and traders expect demand to briefly pause for now.

Saudi Aramco has set its October term propane Contract Price higher at $375/mt, up $10/mt from September, and butane CP at $380/mt, up $25/mt from September. October propane CP rose after holding steady for September, while butane increased for the second month in a row.

Early on Oct. 6, November CP propane swaps was indicated at $389/mt, according to brokers, up from $384.5/mt the previous session.

Tight Supply Buoys Naphtha

Asia's naphtha market is supported by robust demand from steam crackers keen to capitalize on healthy olefin margins, and tight supply from a limited Western arbitrage inflow, sources said.

A North Asian cracker operator said he does not expect current firm naphtha prices in Asia to attract additional Western arbitrage flows at this point due to high freight.

The spread between the November CFR Japan naphtha and CIF NWE naphtha assessments fell $1/mt on the day to $18.50/mt at the Asian close Oct. 5, which is narrower than the $22.50/mt LR2 Mediterranean to Japan freight assessed on Oct. 5, Platts data showed.

Supply in Europe and the arbitrage flows are also limited by the use of naphtha in domestic crackers, while some European naphtha is being shipped to the US as part of gasoline blendstock.

Sources said most Western naphtha arrivals were for heavy grades, and Western cargoes of paraffinic naphtha were typically around minimum 65% paraffin content. However, in order to improve olefin production, steam crackers prefer to use naphtha with a higher paraffin content of 70% or more, which is limited in supply.

Reflecting market strength, CFR Japan naphtha physical crack spread against front-month ICE Brent crude futures has surpassed the $80/mt mark since Sept. 8, and was last assessed up $4.35/mt day on day at $90.50/mt at the Asian close Oct. 5, Platts data showed.

LPG is used for power generation in winter and companies traditionally begin stockpiling from October, making LPG uneconomical versus naphtha as a cracker feedstock, sources said.

Crackers usually consider using LPG when it is at a discount of $40-$50/mt to naphtha. However, with favorable olefin margins, some petrochemical makers had been keen to use LPG even at a $25/mt discount to naphtha to capitalize on higher olefin yields.

Ethylene production yield from naphtha is 0.23, while LPG cracking increases it to 0.36-0.40, said market sources.

Propylene production yield from naphtha is at 0.13 compared with 0.18-0.20 from cracking LPG.

The spread between CFR Northeast Asia ethylene and CFR Japan naphtha has been above the $250/mt breakeven spread for integrated producers since May 12, and was last assessed at $468/mt at the Asian close Oct. 5, Platts data showed.