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Japan naphtha swaps backwardation touches 10-week high

The Japan naphtha swaps backwardation structure jumped 34.6% on the week to a 10-week high on Oct. 11, supported by ethylene-naphtha margins remaining above breakeven levels. However, as margins narrow, steam cracker operators assess reducing run rates, market sources said.

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The front-month November-December Mean of Platts Japan naphtha swap time spread widened $1/mt on the day to $8.75/mt at the Asian close Oct. 11, S&P Global Platts data showed. The swap spread was last higher July 30 at $8.50/mt.

This widening was led by olefin margins remaining positive and above the breakeven level of $300-$350/mt for non-integrated producers. However, end-users' outlook was tepid as the spread fell for the third consecutive day. The ethylene-naphtha spread stood at $376.625/mt at the Oct. 11 Asian close. As the spread inched closer toward hitting the breakeven range, steam cracker operators are considering reducing run rates, market sources told Platts.

"We are struggling to keep the cracker run rate [high] because of the high feedstock price... so we [need to] investigate to [either] export, or sell domestically," a Japan-based end-user said.

The market continues to see supply concerns led by a surge in global natural gas pricing. Total US commercial crude stocks likely declined 500,000 barrels to 420.4 million barrels in the week ended Oct. 8, Platts earlier reported.

Strength in the naphtha market was reflected as the CFR Japan naphtha physical crack spread against front-month ICE Brent crude futures hit more than a five-year high of $143.45/mt at the Oct. 11 Asian close for the second consecutive day. The spread widened $14.225/mt on the week and was last higher on Jan. 5, 2016, at $144.90/mt, Platts data showed.

The benchmark C+F Japan naphtha also peaked to a seven-year high at $773.375/mt at the Oct. 11 Asian close for the second consecutive day. It also increased $49.25/mt on the week as crude remained on an uptrend, Platts data showed.

ICE Brent crude futures was up $14.225/b over the same period at $83.99/mt at the Oct. 11 Asian close. The rise in crude futures came amid expectations of tight supply and strong demand, supporting prices in the near term.