Mideast naphtha heads for US, helps alleviate Asia glut

23 July 2010 08:22  [Source: ICIS news]

(Adds details, traders comments)
By Felicia Loo

SINGAPORE (ICIS news)--Around 300,000-500,000 tonnes of Middle East naphtha were booked to head to the United States next month, a move that would help alleviate the glut in Asia, traders said on Friday.
Much of the fixtures were on provisional bookings, but they were likely to be confirmed in the next few days, they said.

“The arbitrage to the U.S. from the Middle East may work out, as the U.S. could give a better netback,” said a trader.
Asian naphtha prices bounced higher on such arbitrage opportunities to offload excess supply, as demand in this region remained tepid, traders said.

The price spread between first half September and October contracts narrowed to a contango of $6.50/tonne from a contango of around $8 earlier in the week, while the naphtha crack spread against Brent crude futures ended at a 12-session high of $76.70/tonne on Thursday’s close, ICIS data showed.

“The Asian market has been greatly hit by Formosa’s cracker issues. So the arbitrage flows to the U.S. will help to cushion the impact,” said a trader, referring to demand heavyweight Taiwan’s Formosa Petrochemical Corp (FPC).

The company  had temporarily refrained from making spot naphtha purchases, following a cracker outage in Mailiao in early July, and it had even requested defer the deliveries of some term naphtha supply from August to December.

Formosa, whose 700,000 tonnes/year No 1 cracker would stay shut for two to three months since the blast on 7 July, was also seeking government approval to postpone the regular maintenance at the 1.03m tonne/year No 2 cracker at the same site. The No 2 cracker was originally scheduled to be taken off line from August 20-22.

The market welcomed the diversion of Middle East supply to the U.S. as Asia was awash in supply from an armada of imports from the Middle East recently, traders said.

On signs of a glut, onshore inventories of naphtha and gasoline in Singapore rose 591,000 barrels in the week ended 21 July to an eleventh-week high of 11.530 million barrels, according to Reuters quoting data from International Enterprise.

South Korea’s Honam Petrochemical bought 25,000 tonnes of open spec naphtha on Thursday at a discount of $10/tonne to Japan quotes CFR for second half of August delivery, up from $3/tonne on previous spot purchases, traders said.

But, on the other hand, shrinking petrochemical margins weighed on the market, with ethylene prices tumbling to $830-850/tonne CFR NE Asia this week, from $900-940/tonne a month ago and this squeezed the profitability, traders said.

“Fundamentally, nothing’s changed. The market is long on supply and worst, petrochemical margins are falling,” said a trader.

At naphtha prices hobbling near $660/tonne, the margins were in theory no longer feasible, as cracker operators typically require an ethylene-naphtha spread of at least $250/tonne to ensure profitability, traders said.

“At the rate things are going, cracker operators may have to consider curbing runs,” said one trader.

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By: Felicia Loo

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quoted from ICIS News