The Asian naphtha crack against front-month Brent crude oil futures weakened to its lowest in nearly 16 months Thursday, amid weak demand for naphtha.
The crack between front-month ICE July Brent crude and CFR Japan naphtha cargo assessment weakened $7.625/mt day on day to be valued at $49.625/mt Thursday, its lowest since $45.45/mt on January 12, 2015, Platts data showed.
Traders attributed the weakness in the Asian naphtha market to poor demand for gasoline blending, and ready availability of cheaper LPG as a cracking feedstock for ethylene.
"There is a significant amount of [finished] gasoline floating around the region, hence weakening demand for naphtha [as a gasoline blendstock]," a regional trader said Friday.
Traditionally, Asia's demand for naphtha peaks during the second quarter, as regional blenders purchase blendstocks for gasoline blending to meet seasonally higher gasoline demand. But this year, demand is much weaker than expected.
"Gasoline coverage [has] manifested in a very different way. Instead of blenders blending [low octane gasoline] for Indonesia, refiners max out their gasoline yield and directly supply finished grades into the market," another Asian naphtha trader said.
CHEAP LPG ENTERS ASIAN CRACKING POOL
Adding to the demand woes was ample availability of cheap LPG in the region, allowing petrochemical end-users to substitute naphtha in the cracking pool.
The spread between front-month Argus Far East Index propane swap to the Platts CFR Japan naphtha swap widened to as low as minus $74.25/mt last Wednesday. This was the lowest the spread has been in almost 11 months.
The last time the spread was lower was on June 11, when it was minus $75/mt. The spread has since recovered to minus $60.25/mt for June Thursday.
End-users typically switch to using LPG as a cheaper alternative to naphtha for cracking purposes when LPG is about 90% the price of naphtha, or when it is $50/mt less than naphtha.
With the spread at a huge discount, petrochemical plants in Taiwan and South Korea with steam crackers capable of using more LPG were encouraged to increase LPG utilization at their plants to about 10% in May.
They are now looking to increase the LPG utilization to about 15% in June, if LPG prices are persistently cheaper.
"It seems like they are waiting for the best time to switch. That's why naphtha tenders for H1 June are not that many, I guess," a regional trader said last week.
The spot naphtha market in Northeast Asia has now moved to second-half June delivery.
