The Asian naphtha physical market once again flipped into a contango structure Tuesday, September 9 — the second time in less than a month — amid persistent cargo length at the front of the market that is exerting downward pressure, traders said Tuesday.
At the Asian close Tuesday, the prompt CFR Japan second-half October/ first-half November physical cargo spread was assessed at minus 25 cents/mt, down from parity on Monday.
The physical market was last in negative territory on August 18, when the then prompt CFR Japan H1 October/H2 October spread was assessed at minus 50 cents/mt, Platts data shows. That contango lasted for a day.
Asian naphtha market participants said the ample availability of naphtha, especially at the prompt, was causing the front of the market to buckle under pressure.
“It’s definitely looking bearish, nobody can doubt that there’s too much supply around,” a trader said.
“Crude is weak, European naphtha is weak, it’s not bullish at all,” he said.
How long the contango structure is sustained this time is hard to say and depends on how fast cargoes can be cleared, sources said.
“It will last until the prompt clears… there’s not a lot of volume but still, it’s there,” another trader said late Tuesday.
It could not be ascertained how much surplus volume remains in the Asian naphtha market but sources estimate October-arrival Western arbitrage volumes into Asia at around 1.5-1.7 million mt.
For most of the first half of 2014, monthly average arbitrage volumes into Asia have hovered at around 1.3-1.5 million mt. However in August Asia received around 1.75 million mt of arbitrage material and September his is expected to rise to 2 million mt, respectively, with the swell in supply weighing down on the market.
Even as October supplies remain plentiful, traders said the Asian naphtha market continues to see limited activity amid a bearish outlook.
One source said spot demand is likely to remain limited as most end-users are able to meet their requirements for second-half October and November through term contracts.
Another source said most petrochemical end-users have ample stocks to meet their needs, with “many traders taking a wait-and-see attitude.”
The current bearish outlook combined with declining crude prices saw the Mean of Platts Japan naphtha benchmark flat price assessment, or MOPJ, sink to a 14-month low of $879.125/mt.
MOPJ was last lower on July 4, 2013, when it was assessed at $877.75/mt, Platts data shows.
Still, some traders pointed out that naphtha might recover relatively quickly as contango structures tend to be shortlived in Asia as the region is net short of naphtha.
“Economics to switch over to using LPG as an alternative cracking feedstock to naphtha also won’t work now,” a trader said, which might help to clear surplus volumes at the prompt more quickly.
At the Asian close Tuesday, the spread between the October Argus Far East Index propane swap to the Platts CFR Japan October naphtha swap stood at a near two-month high of minus $32.75/mt.
The spread was last higher on July 17, 2014, when it stood at minus $25.50/mt. 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 around $50/mt less than naphtha.
– Platts.com
