Regional naphtha tightness exacerbated by low crude runs
S Korea refiners at 80%-90% capacity on poor margins
S Korea naphtha production expected at 67 million barrels in Q3, down from Q2
Naphtha demand from steam crackers firm on olefin earnings
Singapore — South Korean refiners are operating at 80%-90% of overall capacity in the coming days, which is limiting domestic naphtha supply and pushing values higher, but boosting its steam crackers' spot naphtha demand, industry sources said.
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Register NowTop refiner SK Energy has planned its Q3 run rate at 80%-85%, higher than the record low 74%, or 217,200 b/d, in Q2. Comparatively, the refiner's Q1 run rate was 92%, or a 67,200 b/d reduction from the full 840,000 b/d capacity. South Korea's second-largest refiner, GS Caltex, has an 800,000 b/d capacity and said it did not lower crude run rates by much in Q1-Q2, with run rates little-changed in Q3 despite poor margins. The company declined to comment on its overall run rate.
South Korea's other refiners plan to maintain their current run rates: The country's third largest refiner, S-Oil Corp, has a run rate of just over 90%, while SK Energy's refining affiliate, SK Incheon Petroleum, will maintain an 80% run rate, and Hyundai Oilbank a 90% run rate, company sources said.
On July 15, members of OPEC+ decided to roll back the coalition's output cut agreement to 7.7 million b/d in August from a near 10 million b/d cut. However, this did not call for an immediate boost in crude throughput and oil products output because fuel demand recovery remains fragile and South Korean refiners' main focus is to maintain the supply-demand balance, according to marketing and trading managers at GS Caltex and SK Innovation.
The shortness in South Korea's naphtha supply has also been exacerbated by the low operating rates of condensate splitters across the nation.
The country is expected to produce around 67 million barrels of naphtha in Q3 and is estimated to have produced around 70 million barrels in Q2, 74.6 million barrels in Q1 and 76.1 million barrels in Q4 2019, according to data from Korea National Oil Corp, multiple refiners and splitter operators surveyed by S&P Global Platts.
UPSWING IN CASH DIFFS ON TIGHT SUPPLY
The Asian naphtha complex has been tight on supply from refinery run cuts, increased use of naphtha for gasoline blending, and lower volumes of spot cargoes from Middle East, India and the West of Suez, market sources said.
Cash differentials for spot paraffinic naphtha parcels reached a five-month high of $23.50/mt over July 7-8, against benchmark Mean of Platts Japan naphtha physical assessments, on a CFR Korea basis. The cash differential was last higher on Feb. 12 at $24/mt, Platts data showed.
In comparison, CFR Korea cash differentials averaged 72 cents/mt in May, $9.18/mt in June and the month-to-date average is $19.15/mt, Platts data showed.
However, the premium has since declined following news of arbitrage volumes from the West being arranged for the upcoming September trading cycle, while the cash differential was last assessed down $2.50/mt day on day to $13/mt at the Asian close on July 15, Platts data showed.
STEAM CRACKERS AT FULL LOAD
Despite the supply squeeze, petrochemical makers' demand appetites were voracious given the positive olefin margins, which lifted trading sentiment as most Asian steam crackers are operating at high run rates, and South Korean crackers were operating at full capacity since May, industry sources said.
The spread between CFR Northeast Asia ethylene and physical CFR Japan naphtha assessments was at $405/mt at the July 15 Asian close, down $3.625/mt on the day. This is above the typical breakeven spread of $350/mt for non-integrated producers, and $250/mt for integrated producers, Platts data showed.
Due to the higher naphtha feedstock prices, South Korean steam crackers capitalized on the wide LPG-naphtha spread, replacing some of their naphtha feedstock with LPG in July and August, market sources said. The Far East Index propane swap spread against the Mean of Platts Japan naphtha swap began ranging below the key minus $40/mt switching point from June 23, Platts data showed.
However, the spread has since narrowed this week, and was last at minus $34/mt at the July 15 Asian close, Platts data showed. LPG typically becomes economically viable as a steam cracking feedstock when its price is 90% that of naphtha, or lower.
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July 16, 2020 at 01:14PM
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Analysis: S Korea's low crude runs to buoy CFR Korea naphtha premiums in Q3 - S&P Global
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