Asia is being hit with a naphtha supply glut that could push the market down further, after spot prices in South Korea already flipped from premiums to discounts in late June for the first time since March.
Discounts in South Korea, Asia’s top naphtha importer, widened four times – to $4 a tonne less than benchmark Japan quotes on July 13 – versus a discount of around $1 on June 28.
Naphtha’s front-month outright price for second-half August physical cargoes on July 14 was $3 a tonne lower than for the following month, the deepest contango value since mid-October 2016. The contango weakened to $2 on Monday. In a contango market, prompt deliveries are cheaper than those further out, indicating ample supply.
“The reason for the naphtha weakness is mainly coming from weakness in gasoline and more regional production … exports from the Middle East have increased compared with last year,” said Premasish Das of consulting firm IHS.
Naphtha is a key feedstock for petrochemicals and a gasoline blending component. Asian gasoline demand has mostly been firm, but uncertain US demand for the motor fuel has meant that Europe has been directing more of its naphtha volumes to Asia.
Japan and South Korea are also running their refineries at more than 90 per cent of capacities on average, while Chinese refineries’ June throughput was the second highest on record.
Though Asia will remain structurally short of naphtha, the high run rates mean it will have more of the feedstock from local refiners than usual. Middle East’s naphtha supplies to Asia are expected to reach nearly 3 million tonnes this month and 2.9 million tonnes in August, data from Thomson Reuters Oil Research showed, higher than the 2.8 million-tonne monthly average for January to June.
Additionally, naphtha volumes arriving in Asia next month from the West, including Europe and the Mediterranean, are running at 1.3 million tonnes for the third straight month.