Asia naphtha swap contango widens to largest in 1 year on weak fundamentals

The Asia naphtha paper market reached its widest contango structure in over one year on a lack of demand recovery from olefin producers, ample supply from high refinery production and a steady inflow of Russian shipments.

The Platts-assessed front-month July-August Mean of Platts Japan naphtha swap time spread – a key indicator of near-term sentiment in the complex – fell to minus $6.25/mt at the Asian close June 22, widening 75 cents/mt on the day, S&P Global Commodity Insights data showed. The front-month time spread was last lower on June 15, 2022, at minus $8/mt, S&P Global data showed.

The contango structure extends further down the derivatives curve to the October-November derivative time spread, which entered contango territory June 15 after nine-and-a-half months in backwardation. It was assessed at minus 75 cents/mt at the Asian close June 22, widening 25 cents/mt on the day.

Echoing the bearish outlook, Platts assessed the front-quarter Q3-Q4 Mean of Platts Japan naphtha swap time spread at minus $7.75/mt, marking its lowest level since June 15, 2022, when it was assessed at minus $14/mt.

Ample supply haunts naphtha

On the supply side, there were renewed concerns that tightening EU sanctions on Russia would channel additional flows of Russian cargoes into Asia.

EU countries agreed June 21 to a new package of sanctions against Russia aimed at closing loopholes that allow EU goods to reach Russia via third countries, S&P Global reported earlier.

Key storage hubs Fujairah and Singapore have already reported elevated light distillate stock levels as Russian-origin naphtha looked for a home in Asia.

Singapore received 1.37 million mt of Russian naphtha this year, a sharp jump from the 2022 total of 277,937 mt, Enterprise Singapore data showed.

While Asian naphtha production fell on the month to 7.2 million b/d in April, regional output is expected to rise in the coming months, S&P Global analysts said in the Asia Naphtha Monthly Outlook released June 13.

"Naphtha production in Asia will continue to remain high through Q3 2023 as the region emerges from the peak refinery maintenance season," the report said.

Regional refineries have reported record levels of throughput in recent quarters.

India's refinery run rates reached an all-time high in Q1 2023, similarly fueled by increased purchases of discounted Russian barrels and strong domestic demand, analysts at S&P Global wrote in their Global Refining Outlook June 2.

Moreover, fresh sources of naphtha emerged from Kuwait's Al Zour refinery and Oman's Duqm refinery.

Naphtha demand faces challenges

On the demand side, there was poor buying interest among naphtha-fed steam crackers for feedstock naphtha, with run rates capped by poor downstream margins, sources said.

The key spread between Platts CFR Northeast Asia ethylene and C+F Japan naphtha physical, closely watched by olefin producers, was $185.625/mt on June 22, below the typical breakeven spread for non-integrated producers of $350/mt, and $250/mt for integrated producers.

The petrochemical sector remained under pressure as the segment awaited China's recovery and faced stiffer competition amid greenfield naphtha-fed steam cracker startups in China.

Furthermore, LPG was competitive as an alternative feedstock for naphtha-fed steam crackers, dampening purchasing demand.

This weighed on naphtha market strength. The Platts-assessed CFR Japan naphtha physical crack spread against front-month ICE Brent crude futures has been in negative territory since June 7 and was last at minus $38.55/mt on June 22, S&P Global data showed.

Bearish sentiment persists

Sentiment took a hit as South Korea's YNCC, one of the largest buyers of cracker-feed naphtha, faced a shutdown at its No. 1 naphtha-fed steam cracker on June 21 and at its No. 3 unit on June 22. The No. 1 cracker returned online June 22 and was at 71% run rate on June 23; the No. 3 unit restarted early June 23 at around 14% and was slated to return on-spec in the afternoon; meanwhile the No. 2 unit remained at 80% run rate, sources close to the company said.

Trading sentiment remained bearish as brokers pegged the July-August MOPJ swap time spread at minus $6/mt in mid-morning trade June 23. While no buy tenders emerged from end-users this week, some purchasing activity was due to occur the following week before the half month trading cycle moves from H1 August.

"The market is too weak for the front month; all the related products went down and no one wants to take July cargo. Yesterday, the UK increased the interest rate, this even covered the unexpected drop of US inventory," a naphtha trader said.