The CFR Japan naphtha crack spread against January ICE Brent crude futures plunged to the lowest level in more than two years to close at $49.90/mt Thursday, as the market struggled with excess supply and was dragged down by sluggishness in Europe, according to S&P Global Platts data and market sources Friday.
The crack was last lower on October 13, 2016 at $43.975/mt.
The weakness in Asia stemmed from a supply overhang, as arbitrage volumes from Europe and the US to Asia for November arrival was estimated at around 1.95 million mt, up from around 1.6 million mt in the previous month.
The weakness in European naphtha has fueled further concerns of a bigger arbitrage inflow to Asia next month, amid a market that is witnessing falling petrochemical margins.
The front-month CIF Northwest Europe naphtha crack fell to the lowest in nearly four years at minus $8.55/mt Thursday due to weak gasoline demand globally and scheduled turnarounds at steam crackers in Europe that curbed naphtha demand.
The crack was last lower on January 8, 2015 at minus $8.85/mt. From a demand perspective, naphtha is facing pressure on all fronts - soft gasoline blending demand due to a lackluster gasoline market globally, falling petrochemical margins that could potentially force steam cracker operators to cut runs in the future, and cheap alternative steam cracking feedstock LPG that is posing a competition for naphtha.
The CFR Northeast Asia ethylene spread against CFR Japan naphtha hit a five-year low of $288.875/mt on October 30, but recovered to $309.625/mt Thursday.
Despite a crunch in ethylene margins, steam cracker operators have yet to cut runs as the spread for other olefins such as propylene versus naphtha remained healthy. However should ethylene prices fall further, it could force steam crackers to consider run cuts.
Reforming margins in Singapore, which measures the viability of blending naphtha into gasoline, hit a 2018-low of $8.68/b on October 18, but have since rebounded to $10.04/b Thursday.
The current oversupply needs to be cleared up before the market can recover, a trader said.
