Supply glut pulls down Q4-2014/Q1-2015 Singapore naphtha swap to two-year low

26-Sep-14

As the Asian markets get ready for a likely scenario of being unusually well-supplied during the annual year-end peak demand season, the prompt inter-quarter spread for the FOB Singapore naphtha swap dipped to a two-year low on September 24, as per Platts. The Q4-2014/Q1-2015 FOB Singapore naphtha swap timespread was assessed at a two-year low of plus 28 cents/b Wednesday. Conventionally, the fourth and first quarters of the year are strong demand periods for naphtha as rival cracking feedstock LPG is diverted to the heating sector during winter. In addition, the cracking of naphtha produces ethylene, a building block in the production of plastics, which typically see firm manufacturing demand pre-Christmas and Lunar New Year holiday seasons in Asia. The pronounced weakness currently seen for naphtha demand in Q4 was mainly a reflection of a surge in supply over H2-2014 due to a glut of Western arbitrage volumes into Asia amid startup of new condensate splitters in South Korea and Singapore. The prospect of additional naphtha supply from the Middle East has also weighed on the market, with the UAE's Abu Dhabi Oil Refining Company, or Takreer, soon to commission an expansion that will increase refining capacity at its Ruwais refinery by 417,000 bpd. That expansion, combined with a related project to integrate the Ruwais facility with Abu Dhabi's older and much smaller Umm al-Nar refinery, will raise the UAE's total refining capacity to almost 930,000 bpd and is expected to result in an 81% hike in the company's naphtha production capacity to 10 million tpa. The expanded Ruwais refinery is slated to begin production from its new units by year end. Asia 1.5 million mt/month over June-August of Western naphtha arbitrage supply, up from 1 million mt/month in the same period a year earlier. September and October volumes are estimated to be even higher at 2 million mt and 1.8 million mt, respectively. November-arrival arbitrage volumes are being eyed at 500,000 mt, with traders noting it was still early and there was ample time for it to increase. However, some sources said November-arrival arbitrage volumes may not be as high as in recent months.