20-07-04 Strong world petrochemical demand will be unable to avert a looming excess of naphtha in Asia and Europe over the coming months as new supply pours out of India, analysts and traders have said. Global economic growth, and especially growth in China, has bolstered worldwide demand for plastics and led to strong margins for the petrochemical industry. Petrochemical demand is typically good news for naphtha, the oil product most used as a building block to make the world’s plastics.
Even so, a naphtha surplus is building as exports rise from the Mideast Gulf, Europe, and especially India where domestic users are switching to cheaper natural gas to make fertiliser and run power plants.

With Asian and European petrochemical facilities already working flat out, naphtha sellers are likely to struggle to find buyers that can take the surplus barrels.
"Margins are great, but there’s a finite amount of capacity out there, all of which is running at full. The naphtha market is balanced to long despite good margins," said Poten & Partners Asia oil analyst Jim Weinrauch.
Refiners have maximised crude runs in the US, Europe and Asia to take advantage of strong margins for gasoline and distillates. The increased refinery runs have resulted in increased naphtha output, but this has not been matched by the demand growth seen for other light oil products, analysts said.
"Globally, naphtha is not as tight as other products," said Lawrence Eagles, refining analyst at the International Energy Agency.

India exported as much as 300,000 tons of naphtha for July, about double the volume sold on a monthly basis in 2003, and traders say exports could stay at a monthly 200,000 to 250,000 tons through the end of the year. Indian supply has reduced the Asian naphtha deficit by 9 % to 66,600 tons (600,000 barrels) per day in 2004 from around 73,300 last year, said oil analyst Linda Giesecke at the US-based energy research company ESAI. Asia consumes about 311,000 tpd and produces about 244,000, she said.
The majority of the shortfall is supplied from the Gulf, the Red Sea, Russia and -- when arbitrage economics allow it -- from the Mediterranean. The Indian supply rise has led traders to speculate whether India’s growing exports will reduce or even close the west-east arbitrage from the Mediterranean to Asia this year.

The arbitrage window tends to swing open in the third quarter when China’s autumn agricultural season raises demand for the plastic film used to protect crops and as the country gears up for Christmas orders from the west. The arbitrage was last open at the start of the year when as much as 800,000 tons of naphtha moved east.
Arbitrage in reverse: Increased supply from India recently pushed naphtha prices in Tokyo below naphtha prices in Europe. That led to a reversal in the typical flow of naphtha, with at least one 80,000 ton naphtha cargo from the Saudi Arabia port of Rabigh being fixed for export to northwest Europe instead of Asia for second-half July delivery.

Another cargo that would typically have gone to Asia was shipped from Saudi Arabia to the US, traders said. If Asian prices stay weak, then Europe or the US will have to continue to mop up the surplus, they said. The naphtha oversupply is likely to ease next year when new naphtha crackers come onstream in China and the Middle East, and this could to the resumption of normal arbitrage flows.
"Petrochemical demand is good, but petrochemical buyers are comfortable with naphtha supplies, and look even more comfortable going into August," said a Mediterranean trader.