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CFR Japan physical naphtha crack lowest in over a decade on bearish fundamentals

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CFR Japan physical naphtha crack lowest in over a decade on bearish fundamentals

Singapore — The CFR Japan physical naphtha crack against front-month August ICE Brent crude slumped to a near 11-year low on the back of supply overhang and cracker outages.

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As the Asian close Friday, the CFR Japan physical naphtha crack against front-month August ICE Brent crude hit a new low of nearly 11 years at minus $12.50/mt on Friday. The crack was last lower on December 23, 2008 at minus $15.98/mt, S&P Global Platts data showed.

In the derivatives market, the front-month July CFR Japan naphtha swaps against Brent swaps -- which measures the relative value of the product to crude oil -- fell to a seven-month low of minus $9.88/mt on Friday amid bearish fundamentals.

According to market sources, the Asian naphtha market sagged under the weight of a supply glut as spot demand remained sluggish.

"Asia naphtha physical cracks flipped to a discount for the first time in a decade...battered by ballooning supplies and outages in crackers which choked off demand," said Sukrit Vijayakar, director at Trifecta Consultants.

Spot buying interest on steam cracking grade naphtha was limited as petrochemical producers received maximum nominations on the operational tolerance of their term volumes in lieu of the tumble in flat prices. This led to reduced demand for spot barrels.

In addition, many steam cracker operators were using LPG as a feedstock due to the wide discount between LPG and naphtha, biting into demand for naphtha.

"Cracker outages in Japan and South Korea have depressed demand recently as they came amid the cracker maintenance season which had already reduced buying interest. Growing supplies of alternative LPG feedstock made the situation worse for naphtha sellers as buyers have a cheaper option," Vijayakar added.

The contango structure between the physical first cycle and third cycle hit a near seven-month low of $4/mt last Friday. The spread was last wider on November 12, 2018 at minus $5.25/mt.

On the front-month July/August intermonth timespread, the CFR Japan naphtha spread remained in a contango structure of minus $2.75/mt, marking a six-month low since November 30, Platts data showed.

Meanwhile, the weaker sentiment was also reflected further down the curve with the Q3/Q4 spread falling to minus $2.75/mt on Friday, marking the lowest level since February 8 when it was assessed at minus $3.58/mt.

--Ng Jing Zhi, jz.ng@spglobal.com

--Wendy Cheong, wendy.cheong@spglobal.com

--Edited by Nurul Darni, nurul.indriani.darni@spglobal.com