An obscure hydrocarbon is bad omen for global economy
Asian production of naphtha is slipping amid surging supply of U.S. shale gas
An obscure product made by oil refineries has a grim story to tell investors right now about the fortunes of the global economy.
That product is naphtha, something used to make a vast array of goods while also being integral to churning out gasoline. Oil refiners’ margins from making it are the weakest in years in Europe and Asia. Unusually, some petrochemical plants in Asia have even been losing money when processing it.
Signs of weakening manufacturing in China could scarcely have come at a worse time for the market, given a backdrop of surging U.S. shale oil and gas supply that’s flooded petrochemicals producers with the raw materials they need. With some of those plants undergoing maintenance, it’s little wonder the naphtha market is taking a hit.
“Naphtha demand is simply very sensitive to economic sentiment and growth,” said JanJacob Verschoor, London-based director of Oil Analytics Ltd., which keeps track of the margins of hundreds of oil refineries around the world. “The trade war with escalating tariffs, has killed manufacturing sentiment in the East, thereby weakening margins of petrochemical plants.”
Naphtha rarely grabs headlines because it’s usually not consumed directly. Instead, refineries make it from crude oil and then use it to churn out gasoline. Likewise, petrochemical plants process it to make what ultimately becomes plastics and other manufacturing rawmaterials. The fuel was on board a tanker recently attacked just outside the Persian Gulf, part of a spate of incidents targeting shipping in the region.
The profits an oil refiner makes from turning crude oil to naphtha — known as crack spreads in trader jargon -- are plunging. In Japan, a benchmark for the fuel in Asia, they slumped to the lowest in at least four years in recent weeks. Corresponding indicators in Europe also remain seasonally very weak, prompting speculation they could be encouraging some refiners to process less crude.
The U.S.-China trade-spat appears to be hurting the Asian country’s economy, a vital driver of demand for naphtha. Retail sales there are at the lowest level in years while car sales have fallen for 12 straight months. China’s Manufacturing PMI index was at 49.4 points in May, the weakest for the time of year since at least 2005. Profits of petrochemical producers in the region have been withering.
It’s not just demand that’s an issue. Naphtha competes with propane as a feedstock for petrochemical plants.
Recent weakness in the price of the liquefied petroleum gas, another consequence of the U.S. energy boom, has heavily diminished the appeal of naphtha in the past five weeks, Hui Heng Tan, an analyst at Marex Spectron, wrote in research note dated June 10. With the U.S. exports of the LPG set to accelerate, petrochemical plants’ appetite for naphtha may not rebound anytime soon.
The other market where naphtha is widely used — gasoline — is not picking up the slack created by weak petrochemicals demand.