June 23, 2023 [Argus]- Waterborne WTI crude at the US Gulf coast has declined by 90¢/bl against September Ice Brent since the beginning of June on weak demand from Asia-Pacific refiners, driven in large part by a surplus of naphtha, a major component of refined WTI.
Spot assessments for WTI loading at the US Gulf coast fell to a $3.10/bl discount to September Ice Brent on 14 June, reflecting its widest discount to the benchmark since 25 May — the final day of the June US trade month. Argus has counted 11 very large crude carriers (VLCCs) of US crude purchased by Asia-Pacific buyers in the current trade month compared with 16 in June trade, pointing toward weakening demand from the region.
Refiners in the Asia-Pacific have only purchased their base requirements of US light sweet crude so far, according to market participants, and the July VLCC trading window is expected to wrap up in the coming days.
A surplus of naphtha in Asia-Pacific has resulted in negative refinery margins for the petrochemical feedstock, causing refiners to trim their purchases of US WTI and West Texas Light (WTL). Naphtha makes up about 35pc of WTI’s product yield and 40pc for WTL.
The naphtha surplus has also eased refiners’ demand for condensate in the region causing condensate prices to fall sharply.
The naphtha margin in Japan, or the Argus cfr Japan naphtha premium to front-month Ice Brent crude values, hit -$5/metric tonne on 7 June and has largely remained in negative territory since.
The overhang in the naphtha market has been partly driven by an increase in flows from Russia to Asia-Pacific since the product ban on Russian shipments to Europe took effect in February this year. Close to 1.38mn t (396,000 b/d) of Russia-origin naphtha arrived in May, a four-year high after three consecutive months of increases, according to Vortexa data.
Manufacturing activity in China, a major driver of petrochemical demand, came in below expectations in May. China’s manufacturing purchasing managers index (PMI) was 48.8pc in May, a decrease of 0.4pc from April, stated the NBS. The NBS considers a PMI above 50pc indicates a prosperous manufacturing industry. May is the second consecutive month that the manufacturing PMI has been below 50pc.
The tapering of demand for US crude across the Pacific Ocean has weighed on the domestic market. US crude inventories experienced an unexpected 8mn bl build the week ending 9 June, according to US Energy Information Administration (EIA) data. US crude stocks usually decline during the US driving season, but a decline in export flows could slow that decline over the next month if Asian-Pacific demand continues to wane.
The contango structure for July-August Nymex light sweet crude widened by 10¢/bl to 19¢/bl this over the course of June. A widening contango of Nymex futures, where the spot price is lower than future prices, is typically indicative of excess of crude supplies in the US. Nymex’s discount to September Ice Brent has meanwhile widened by about 90¢/bl since the beginning of June to roughly $5/bl.
Departures of US crude to the Asia Pacific declined by a fifth to about 46mn bl in May from a record high of roughly 58mn bl in April, according to Vortexa data. Based on preliminary data, it appears that crude departures from the US will decline again in June.
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