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Russian supplies could keep Asian naphtha markets subdued in H1 2023

By Mohi Narayan

NEW DELHI (Reuters) - Asian naphtha markets are likely to stay depressed in the first half of 2023 as the region prepares to absorb Russian supplies after Europe's ban on Moscow's oil products takes effect on Feb. 5, and demand from the petrochemical sector remains subdued.

Traders and analysts expect some of the naphtha that Russia can't sell into Europe following the product ban to reach Asia via Middle East commercial hubs. Europe, on the other hand, is likely to source its supplies from the Mediterranean region.

Expectations of higher supplies to Asia amid changing trade flows could keep naphtha prices and refiners' margins depressed. Naphtha margins plunged by 87% in 2022 to $21.13 a tonne over Brent crude and the spot price fell by nearly 13% to $647 per tonne last year.

Margins and the spot price have risen slightly in January so far, driven by weakness in crude oil benchmarks, but the upside has remained limited due to poor petrochemical demand, analysts said.

Graphic: Naphtha https://www.reuters.com/graphics/ASIA-NAPHTHA/OUTLOOK/akpeqamgmpr/MicrosoftTeams-image%20(27).png

EBBING FLOWS TO EUROPE

Russia supplied nearly 3 million tonnes (73,970 barrels per day) of naphtha to Europe in 2022, compared with about 2 million tonnes a year earlier, according to Kpler and FGE data, as the product ban deadline nears and buyers build their stocks.

"Make hay while the sun shines as long as the feedstock is discounted and then source alternative supply after the deadline," Kpler's senior oil analyst Kevin Wright said, explaining buyers' behaviour.

Russia's exports to Europe have dropped to about 500,000 tonnes in January as trade is being diverted to avoid imminent sanctions.

Russian exports to Asia decreased in 2022 by about 868,000 tonnes to nearly 1.6-1.8 million tonnes, Kpler and FGE data showed. Kpler's Wright expected that trend to reverse.

"I would expect Russian naphtha exports to Asia to pick up strongly in 2023, especially to India," Wright said, with buyers drawn by heavy discounts for the product.

Graphic: Russia naphtha exports https://fingfx.thomsonreuters.com/gfx/ce/klpygzdnmpg/Pasted%20image%201673530653477.png

CRACKER MARGINS AND RUN RATES

In terms of margins, analysts at Wood Mackenzie, FGE and Energy Aspects expect them to remain weak in the first half of the year after posting an annual loss last year stemming from weak Chinese demand due to COVID related restrictions.

"China's domestic demand is likely to be lower than previous years as COVID seems to be raging once more there, especially now that there are no restrictions in place, and that could hurt naphtha import demand as a result," Kpler's Wright said.

Adding to demand woes, fears of a global slowdown in growth will further weigh on naphtha cracks.

"We have Singapore naphtha cracks at their weakest in the first quarter in 2023 and then slowly recovering," said Alan Gelder, vice president, refining, chemicals and oil markets at Wood Mackenzie.

Meanwhile, South Korea's LG Chem and Taiwan's Formosa Petrochemical extended shutdowns in response to negative naphtha margins in September to October last year, while some others in the region slashed operating rates, a trend that is likely to continue in the first half of 2023, analysts and traders said. [O/ACRACKER]

Formosa sees "no sign of recovery in demand" in the first half of 2023 due to inflationary pressures in key economies, the company spokesman K. Y. Lin told Reuters.

"There is an expectation in the market that inflation could slow in the second half of the year, demand could pick up pace only then," he added.

(Reporting by Mohi Narayan; Editing by Florence Tan and Simon Cameron-Moore)