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Analysis: Unusual export offers add to naphtha oversupply in Asia

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Analysis: Unusual export offers add to naphtha oversupply in Asia

Singapore — The unusual cocktail of rare export offers by some Southeast Asian countries, robust outflows from India, and market conditions favoring flow of cargoes from the West have left naphtha buyers in Asia spoilt for choice, a trend that is likely to continue in the coming months.

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With refineries steadily returning from maintenance at a time when China's appetite for imports remains feeble, Asia's naphtha market may feel the pinch as it braces for a situation of oversupply in the coming months, according to market participants who spoke to S&P Global Platts.

"Over the next few months, Asia may face a scenario in which demand could lag behind supplies," said Nevyn Nah, refined oil products analyst at Energy Aspects. "Even Middle East supplies are also expected to rebound with the return of condensate splitters in Qatar and the UAE."

According to Facts Global Energy, lower naphtha demand stems from a variety of reasons, such as high cracker maintenance in China and easing ethylene-naphtha cracks leading to lower cracker runs, particularly in Europe, resulting in more arbitrage cargo arrivals in Asia.



In addition, the market is witnessing some switchover to LPG as feedstock, as the propane-naphtha spreads are to some extent favorable.

"Naphtha cracks remain under pressure as higher supplies are met with lower demand," said Sri Paravaikkarasu, head of oil, East of Suez at FGE.

"The coming months will remain a mixed bag. The weakness could persist for a couple of months as we have a new splitter coming online in Dalian in June, and Japanese crackers should commence maintenance turnarounds. However, we are bullish beyond that timeframe," she added.


SUPPLY-SIDE FACTORS


The CFR Japan naphtha crack against front-month ICE Brent crude oil hit the lowest level in seven months at $53/mt on May 25, before rebounding to $56.80/mt on May 31, data from Platts showed. The crack in May averaged at $58.34/mt, down 20% from the April average of $73.38/mt.

Adding to the supply stream, India, as of now, is expected to export around 635,000 mt of naphtha for June loading -- higher than the typical monthly export volume of 500,000-600,000 mt, based on Platts calculations.

Apart from Indian exports, rare volumes of naphtha have emerged from Southeast Asia.

In a rare move, Indonesia's state-owned Pertamina issued a sell tender last week, offering 170,000 barrels of naphtha for June 1-30 loading from Tuban, which was most likely offered because of a scheduled refinery turnaround, market sources said.

Since December 2015, Pertamina has been a net importer of naphtha, after it lost its net exporter crown in March 2015.

Pertamina takes naphtha from Indonesian TPPI's Tuban facility every month for blending at its refinery to produce 92 RON gasoline. When the company has a refinery turnaround, the oil and gas firm is left with surplus naphtha, which is then offered for exports.

Pertamina plans to shut its 120,000 b/d Dumai and 50,000 b/d Sei Pakning refineries in central Sumatra for 40 days of maintenance in July, taking a total 170,000 b/d of capacity offline.

And in Malaysia, Hengyuan Refining Company issued a sell tender offering 24,000-48,000 mt of naphtha with 70%-78% paraffin content for loading from Port Dickson between August 1 and December 31, 2017. Hengyuan will have four-eight parcels to offer over the five-month period. Each cargo will be 5,000-6,000 mt. The tender closed on May 31 and has validity until June 7.

This will be the company's first naphtha export tender after Shell sold its 51% stake at the 125,000 b/d Port Dickson refinery to Malaysian Hengyuan International Ltd., a subsidiary of Chinese independent refiner Hengyuan Petrochemical.


WEAK INTEREST FOR CARGOES


On the demand side, buying interest from Japan, South Korea, and Taiwan remained largely stable.

Petrochemical margins have narrowed, thanks to a sharp fall in ethylene prices this month. The spread between CFR Northeast Asia ethylene against CFR Japan naphtha fell from $763.88/mt on May 2 to $587.63/mt on May 31, Platts data showed.

At the current spread, it remains profitable to produce olefins using naphtha. If the spread falls under $350/mt, it may not be economical to produce olefins, which could result in run cuts at steam crackers and lower naphtha demand.

While import demand from most Northeast Asian countries has been fairly stable, demand for imported naphtha cargoes from China has been falling because of higher domestic production.

China's naphtha imports in April fell 50.5% year on year to 122,000 b/d, according to latest data released by the National Bureau of Statistics.

Naphtha imports over the January-April period averaged at 158,000 b/d, down 24.4% over the same period last year.

Chinese refiners, particularly the independent refineries in the northeastern Shandong province, have raised crude refining throughput and increased naphtha yield to 6.24% over the January-April period, from 6.11% over the same period in 2016. Naphtha output over January-April was at 11.392 million mt, up 5.4% from January-April 2016.

"After a couple of months, naphtha demand should receive boost both in Asia and the Middle East as the ramp-up of Sadara cracker and the commissioning of PetroRabigh's aromatics expansion project should tighten Middle East balances. Reliance intends to commission its Phase II aromatic expansion project some time later this year," Paravaikkarasu added.

--Sambit Mohanty, sambit.mohanty@spglobal.com
--Wendy Cheong, wendy.cheong@spglobal.com
--Edited by Arnab Banerjee, arnab.banerjee@spglobal.com