Taiwan, not Texas, may squeeze summer gasoline

SINGAPORE (Reuters) - If U.S. gasoline prices rally further this summer, traders will have as much cause to blame a new petrochemical plant in Taiwan as any refinery in Texas.

Analysts have expected Taiwan conglomerate Formosa Petrochemical Corp.'s (6505.TW) new 1.2 million tonnes per year (tpy) naphtha cracker -- the biggest in Asia -- to push up naphtha values when it starts up later this month, turning up to 90,000 barrels per day (bpd) of the feedstock into ethylene.

But some are drawing a link between the tightening market for Asian naphtha -- which has rebounded to near the unexpected record highs of March -- and U.S. gasoline, stocks of which saw their sharpest spring decline on record mainly on lower imports.

The Formosa cracker is the latest in a string of new and expanded petrochemical plants across Asia. It will launch just days before the peak driving season in the U.S., underscoring the growing global competition for light-end oil products.

The link is not direct: Asia does not export significant volumes of gasoline or blendstock to the United States. But it could be felt through the subtle shift in trading flows and refinery slates in Asia, the Middle East and Europe, some say.

"The West of Suez is becoming net short naphtha, so with that you will need cargoes moving in regularly from Europe," said N. Ravivenkatesh, an analyst at Purvin & Gertz in Singapore.

"Some of that would be pulled out of the gasoline pool and that could be impacting European exports to the U.S."

That could add even more spark to U.S. gasoline crack spreads, which touched post-hurricane peaks of above $30 a barrel late last week, analysts say. It could also keep retail pump prices near $3 a gallon, as the government predicts.

ASIA REFORMERS FAVOUR PETCHEM

Signs of the shift are clearest in Asia, where chemicals demand is growing swiftly thanks to economic growth in China, South Korea and Japan, while naphtha supplies out of India were curbed early this year and refinery runs were maxed out.

Driven by margins, companies that run reformers -- refining units that can transform aromatic naphtha into either gasoline blendstock or a petrochemical feed -- have maximized the latter.

"It looks like more than two-thirds of Asia's reforming capacity is now being pushed into aromatics petrochemicals -- normally it's one-third or less," says Al Troner, who runs Asia Pacific Energy Consulting Inc., a firm that advises oil companies on Asian refinery slate issues and feedstock markets.

With regional reforming capacity estimated at around 2.5 million bpd, that one-third swing may have cut out as much as 800,000 bpd in gasoline blendstock output, Troner estimated.

Refiners in South Korea, where at least three major petrochemical firms are expanding capacity, also responded to the higher margin incentives offered by the petrochemical market.

The country's refiners raised first-quarter naphtha output by over 40,000 bpd compared to the average of 2003-2006 for that quarter, government data show. Production of gasoline -- sometimes exported to the United States -- rose just 3,000 bpd.

Refiners in Europe do not appear to have altered their first-quarter slates to accommodate the greater pull on naphtha, but they did cut back sharply on sales to the United States, according to U.S. data and oil traders.

They ramped up arbitrage shipments in April but have again curbed them for May as European prices rally. <O/MOGASARB>

Analysts warned that the renewed surge in naphtha values to near record-high premium of more than $200 a tonne to Brent crude could stymie further flows, and keep pulling until the next tranche of new Asian refining capacity in late 2008 or 2009.

"Essentially for this year and next year the Asian naphtha market is pretty much tight," said Purvin & Gertz's Ravivenkatesh. "There should be some linkage (to U.S. gasoline)."

Formosa's expansion represents nearly half of the additional 2.5 million-tpy of naphtha cracker capacity that industry consultant CMAI estimates will switch on from the fourth quarter of 2006 to the end of this year.

Feeding those units will need nearly 200,000 bpd more naphtha, or a wider switch to alternative feedstocks. Ravivenkatesh expects that naphtha to come from Europe.

U.S. DRAW

The link to naphtha may also help explain a surprisingly deep draw on springtime U.S. gasoline supplies, initially linked to a heavier-than-usual refinery maintenance.

Although refinery utilization rates in February to April this year are down about 2.5 percentage points from the five-year average, refiners have shifted their slates to boost gasoline output by 5 percent versus the seasonal norm, a Reuters analysis of government data showed.

The problem appears to be imports.

U.S. imports of gasoline over the past three months are down 155,000 bpd on the year-ago period, an almost 14 percent drop, breaking a near 10-year streak of rising spring imports as U.S. refineries failed to keep up with steadily growing demand.

That import shortfall amounts to some 14 million barrels, which is also how far inventories are below their five-year average as of last week. The typical spring stockdraw since an early-February peak is now the biggest since at least 1990.

"The U.S. is no longer the strongest bid for global supplies," analysts at Goldman Sachs said in a report a week ago.

Quicker economic growth outside the United States, the weakness of the U.S. dollar aiding non-dollar buyers and heavy European refinery maintenance have limited the inflows, it said. The report did not mention the effect of naphtha markets.

"Gasoline prices will likely have to spike further to invite more supply or moderate demand growth," it said.