Naphtha outlook clouds over

Chinese gasoline margins are weakening, eroding the economics of blending naphtha into gasoline, reports Argus China Petroleum. Spot gasoline margins in China averaged around $10/b in the first half of this year. They have fallen steeply since then, averaging just $3.40/b in 3Q2015 – narrowing the gasoline premium to naphtha.

The strength of gasoline – and relative weakness of key gasoline feedstock naphtha – prompted refiners to curb sales of the intermediate product in the first half of the year. Profits were far higher from reforming naphtha, or blending it into gasoline, than marketing the surplus. Major producers PetroChina and Sinopec reduced naphtha production by 6% to a combined 1.21mn b/d in January–June compared with levels a year earlier, hitting third-party sales.

Gasoline margins have now come off sharply, dragging naphtha lower. Refiners continue to prioritise gasoline production over naphtha sales for the time being.

PetroChina’s 100,000 b/d Hohhot refinery in Inner Mongolia has cut naphtha yields to below 6% and stopped all naphtha sales in April. It boosted profits by Yn20mn ($3.2mn) or Yn1/b of refined crude in the first half, by reducing its sales of naphtha. All its naphtha is now going into the gasoline pool, refinery officials say. Sinopec’s 300,000 b/d Tianjin refinery is also reported to have been paring naphtha yield.

The reduction in sales to other refiners and petrochemical producers drove the latter to scour the seaborne market for feedstock supplies, pushing Chinese naphtha imports up to 140,000 b/d in January–July. Imports in June and July averaged a record 190,000 b/d.

Refiners sell most surplus naphtha to petrochemical producers as an ethylene feedstock, while gasoline blenders account for less than 10% of naphtha use. However, they now face a decline in the profitability of naphtha cracking, in addition to weakening gasoline profits. Ethylene cash margins, after operating costs, have fallen to Yn431/t from Yn643/t in 2Q2015. Naphtha’s share of the ethylene feedstock mix has been shrinking, too, as crackers step up their use of olefins produced from coal, and other natural gas liquids. Ethylene production in January–July shrank by 0.4% on the year to 840,000 b/d.

Data on Chinese naphtha output does not give a complete picture of how much is produced. National Bureau of Statistics (NBS) data cover ‘tea-kettle’ (mini) refiners as well as external sales of naphtha by PetroChina and Sinopec, but do not include naphtha that the oil giants refine. The far higher ‘light chemical oil’ value describes total production of naphtha by PetroChina and Sinopec, but includes small amounts of other products such as jet fuel and fuel oil, and does not show naphtha output from other refiners. The partial data suggest China’s total naphtha production is around 1.3mn b/d.