Surplus naphtha supplies in Asia will exert downward pressure on prices. Producers are feeling the heat as they offer material for the month, as they face problems in renewing term contracts due to perceived high offers by buyers.
When supplies were tight in June, Kuwait Petroleum Corp (KPC) managed to raise its August 07-July 08 premium by US$5 compared with its April 07-March 08 premium to US$21 a metric ton to the Arabian Gulf on a free-on-board basis.
However, this scenario seems poised to change as the supply glut shows no signs of easing for the next couple of months in this buyers' market.
Certain factors seem responsible for this supply glut:
One is expectation of increased exports from India into Asia.
Traders expect India to continue exporting an average of 700,000-800,000 tons of naphtha a month into Asia, up from less than 500,000 tons a month between January and March. The high volume of exports from India is due to a combination of factors: expansion of Essar Oil Ltd's refinery from 150,000 bpd to 210,000 bpd (expected to end by December 2007) and weaker domestic demand as Indian end-users change over to natural gas from more expensive naphtha.
The situation is expected to ease at the beginning of next month when Essar completes its expansion program and naphtha export volume from India reduces when India switches its gasoline specifications to meet Euro III standards.
The second factor is high refinery runs in Japan and South Korea that have increased discounts on naphtha spot cargoes since June.
S Korea's Yeochun NCC bought 25,000 tons of open-specification naphtha for H1-November at a discount of $9-10/ton to the Japan mean on a cost-and-freight basis compared with LG Petrochemical's purchase in early June of a parcel of the same size and grade for H2-July arrival at only a "slight discount" to the Japan mean, C&F basis. Saudi Arabian Oil Co has had lack of success in selling its October 2007 to March 2008 A180 light naphtha at a $16/tonne premium to its own formula after more than two weeks' of discussions.
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