By Mohi Narayan
NEW DELHI (Reuters) – Asia’s naphtha margins soared to record levels as supplies from Russia are expected to drop due to aggressive Western sanctions imposed on Moscow following its invasion of Ukraine, analysts and traders said.
The drop in Russian supplies is expected to affect Asian importers such as South Korea, prompting them to seek alternative supplies from the United States and the Middle East and contemplate reducing production at naphtha crackers if feedstock costs are too high.
Naphtha margins surged to a record high of $212.15 a tonne on Tuesday, Refinitiv data showed.
The spread between second-half April and second-half May jumped to $37.50 a tonne in backwardation, the widest since February 2013. Prompt prices are higher than those in future months in a backwardated market, indicating tight supplies.
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The Ukraine crisis and the uncertainty over Russian economic sanctions have forced ship owners to hold off from going to Russia at the moment, a trade source said.
There is only one tanker Gulf Coral provisionally chartered to Black Sea to load naphtha for Asia in March so far, according to Refinitiv.
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Russia accounted for around 14% of Asia’s total imports in the last 24 months, data from Vortexa showed.
Imports from Russia have already fallen in January-February to 13.4 million barrels, down 1.5 million barrels from a year ago, Refinitiv data showed.
A source at a Korean naphtha importer with a “high” percentage of Russian imports said the company was monitoring the situation closely.
“The situation is so changeable with issues beyond financial sanctions and there’s also potential insurance issues,” he said.
Three other sources from South Korean importers said there are no disruptions, as of now, because they have signed contracts for most of March supplies.
However, the importers are preparing to buy naphtha from other countries if required, although such purchases are expected to increase their costs and thin their margins, they said.
Asia is structurally short of naphtha, and depends heavily on imports from the Middle East, Russia and other western suppliers such as the United States.
“It is uncertain at the moment but we could see some reshuffling in trade flows,” said Armaan Ashraf, an analyst at consultancy FGE.
“Cracker margins are bad at the moment, it could materialize in run cuts as well, and aromatics-related demand too could see some destruction,” he added.
However, naphtha exports from the United States might be capped due to strong gasoline demand and refinery turnarounds, Ashraf said.
“Also, another factor is fuel oil tightness in the U.S., limiting FCC inputs, and hence gasoline output as well, meaning more naphtha needs to be pulled into the refining system for gasoline production,” he added.
(Reporting by Mohi Narayan in New Delhi and Joyce Lee in Seoul; Editing by Florence Tan and Sherry Jacob-Phillips)
