Why an obscure hydrocarbon may be carrying bad news for the global economy

That product is naphtha, something used to make a vast array of goods while also being integral to churning out gasoline.

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 Jan-Jacob 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 oudrot gasoline. Likewise, petrochemical plants process it to make what ultimately becomes plastics and other manufacturing raw-materials. 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.

Business Standard