Naphtha spikes and PXN spread squeezed

Crude oil price has spiked since the Russia-Ukraine conflict on Feb 24. Petrochemical products are thus driven up, especially for naphtha.

As of Mar 2, naphtha to Brent crude futures spread widened to $205/mt, new high in more than a decade. However, profits of downstream products such as olefins and aromatics were squeezed sharply. The total of combined spread of six products including, ethylene, propylene, benzene, toluene, mixed xylenes and PX to naphtha narrowed to $695/mt, also hitting record low.

Besides from increasing demand for refined oil products because of eased restrictions from the pandemic outside China, the most important driving force to naphtha was the sanctions against Russia after the outbreak of the conflict.

According to WTO statistics, Russia exported about 27~28 million tons of naphtha per year in 2018-2021, accounting for 7% of global total exports of naphtha.

Therefore, the sanctions against Russia, especially the excluding of seven Russian banks from SWIFT, have dealt a severe blow to the markets heavily dependent on supplies from Russia.

The main destinations receiving Russia’s naphtha exports are as follows.

South Korea came first, accounting for 32% of Russia’s naphtha exports in 2021, followed by Europe, US and some Asian countries. For Asian market, South Korea is a large country in Petrochemical production. Therefore, the rise in naphtha price could exert great impact on South Korea.

Russia is the largest origin for South Korea’s naphtha imports.

According to South Korea’s customs statistics, the country’s naphtha imports had increased year by year in the past 6 years, with annual growth rate at around 5.5%. In 2021, naphtha imports reached 29.61 million tons. In terms of importing origins, Russia has exceeded US in 2017 to become the largest origin, accounting for 21% of the imports in 2017, and 26% of total in 2020. The proportion reduced slightly to 24% in 2021.

Therefore, with the sanctions against Russia, naphtha price spiked, most notably in Asian market. The price spread of naphtha in Asia to that in US or Europe widened rapidly.

According to WTO statistics, the largest 4 exporters of naphtha worldwide were UAE, US, Netherlands and Russia, accounting for 56% of the global naphtha exports in 2020. However, with the imports considered, the top 5 net exporters of naphtha would be UAE, US, Russia, India and Netherlands. As a result, if Russia’s naphtha exports are restricted, supplies from those top countries could increase to fill the gap.

The impact from the sanctions is great on naphtha supply and demand situation. The recent price spike comes as a result of investors’ buying and restocking, while further impact is still uncertain. It still needs to be seen how the sanctions would impact Russia’s trading. And after the price spike, the profits of olefins and aromatics are squeezed sharply to negative territory, and if it is continues and it is difficult to buy feedstock, some plants may cut operating rates.

According to the investigation, South Korea mainly import light naphtha or full-range reformed naphtha, mostly to produce olefins. Therefore, the impact could be more manifested on olefins in South Korea, if Russia’s naphtha supply is disrupted. As naphtha trading is conducted 1 or 2 month in advance, earlier orders can be fulfilled, while the impact on new discussions and trades in the future still needs to be seen.

As for PX, with PXN spread narrowing rapidly to around $150/mt recently, the profits has slipped to negative territory again. Some producers may consider raising operating rates earlier, but now are observing on sidelines, and PX plant operating rate is currently stable. If the profits worsen, some plants may consider cutting operating rates, and even, as some participants say, some refineries may reduce petrochemical production but sell naphtha instead. However, it still need further observations.