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Asia's stubborn naphtha glut seen lasting months

[SINGAPORE] A stubborn supply glut and tepid demand from gasoline producers have cut the profit from making naphtha in Asia by almost two-thirds this year, with faltering appetite from China keeping the outlook dim for the next few months, analysts said.

Chinese demand for naphtha looks set to slow, albeit from very high levels, with just over 20 independent refiners in the country switching from using the light fuel after they were given licences to import crude to churn out gasoline.

Naphtha is mainly used to make plastics, but it can also be reformed into gasoline.

The supply overhang has cut Asia's naphtha crack, the profit-margin when it is produced from Brent crude, to around $50 a tonne from January highs of almost US$150.

"Given the ... expected weaker gasoline market, and with increases in crude oil processing capacity, Chinese imports are expected to be lower," said Premasish Das, director for Asia and Middle East downstream oil markets at IHS.

He estimated Chinese imports averaging around 130,000 to 135,000 barrels per day (around 450,000 tonnes a month) in 2016. That compares to a record of about 950,000 set last December.

Das added that Asia's average net monthly naphtha imports, which were up 11.5 per cent at 5.8 million tonnes in 2015 from 2014, were likely to drop to 5.5 million tonnes this year.

Import volumes will also be dented by tapering demand from Japan, Asia's No.2 fuel consumer. Its monthly totals averaged 1.16 million tonnes from January to April, down 13.4 per cent from the same period last year, as the country adjusts to a declining population and a push towards more fuel-efficient vehicles.

The Middle East and India supply 4 million tonnes a month of naphtha to Asia, with the rest coming from the West - including Europe, the Mediterranean and the United States - which sent an average of 1.62 million tonnes to Asia each month in the first five months of the year.

But with at least 300,000 tonnes of liquefied petroleum gas (LPG) expected to replace naphtha in the crackers that are used to make olefins, the building blocks for plastics, in June and July respectively, Asia needs no more than 1.0 to 1.1 million tonnes of Western cargoes a month, said a Singapore-based naphtha trader.

Traders hope markets will improve towards year-end, with petrochemical makers likely to use less LPG as prices become more expensive due to winter-heating demand for that fuel.

Cuts in refinery runs could also lift markets later this year. "It would probably happen in the third quarter," said Nevyn Nah, an analyst at Energy Aspects.