Bearish sentiment lingers in condensate market despite tighter supply

Australia's February-loading North West Shelf condensate program has emerged with one less cargo on month, but sentiment for condensate grades remains under pressure from thin margins for end-users, sources said.

The latest NWS program reflects only two cargoes, according to market sources, one less than the January-loading program.

A joint venture between Mitsubishi Corporation and Mitsui & Co, also known as MIMI, will be holding the first 650,000-barrel cargo loading over Feb. 7-11, while oil major Shell will be holding the second cargo of a similar size loading over Feb. 20-24, according to market sources.

Despite the tighter supply on month, sentiment for condensate grades has taken a bearish turn amid weak margins for end-users, sources said.

"[Premiums] should weaker than last month, but not much because it is shorter program," said a crude oil trader based in Southeast Asia. In the January-loading trading cycle for the condensate, oil majors Chevron and BP were heard to have sold a cargo of NWS condensate each to end-users in Asia at premiums around mid-high $2s/b to Platts Dated Brent assessments on an FOB netback basis, traders said.

Weak downstream margins for naphtha and petrochemicals are reducing the ability of end-users to pay strong spot premiums for condensate grades, which could result in lower traded levels this month, sources said.

Second-month naphtha swaps crack against Dubai swaps have declined sharply, averaging at $1.99/b this month up till Dec. 6, as compared to an average of $3.78/b over November, S&P Global Platts data showed.

"Petrochemical margins are not good, buyers have come to a point where they still need to run, but cannot afford to pay up... buyers might push down the premiums," said a condensate trader.

In a similar vein, an end-user based in North Asia said "Starting to buy PX [paraxylene] sounds like a more wise strategy now."

Some end-users are considering, or have already switched towards, processing alternatives such as light sweet crude grades, diverting demand away from condensate grades and further dampening demand cues, sources said.

Meanwhile, an Australia-based trader agreed with the bearish outlook on condensates amid weak margins for end-users, but added that the "tide may be turning with flat price recovery, so bullish sentiment may return."

Weak Asian naphtha market

The Asian naphtha market was bearish on the back of low LPG prices that are expected to weigh on demand for naphtha.

Naphtha demand is likely to dampen as crackers turn to alternative feedstock LPG. The physical spread between CFR North Asia propane versus CFR Japan naphtha narrowed $49.875/mt week on week to $11.625/mt at the Asian close Dec. 6 after hitting negative territory Dec. 2, at minus $12.75/mt, Platts data showed. The physical spread was last negative at minus $1.25/mt July 29, Platts data showed.

The narrowing spread has been closely tracked by end-users, as LPG produces more olefins than naphtha feedstock, sources said.

"[The market is facing downward pressure] due to the weakness of LPG... LPG should come into the cracker especially [in South] Korea," an end user told Platts.

LPG typically becomes economically viable as steam cracking feedstock when its price is 90% that of naphtha, or lower.

Taking its cue from the lower crude prices, the benchmark C+F Japan naphtha cargo fell $46.625/mt week on week to $662.875/mt at the Asian close Dec. 6, Platts data showed.

Weakness in the naphtha market was seen as the CFR Japan naphtha physical crack against front month ICE Brent crude futures fell $9.80/mt week on week to $129.25/mt at the Asian close Dec. 6, Platts data showed. The physical crack was last lower nine weeks ago when it rested at $129.225/mt, Platts data showed.