A polarised market: physical prices stronger than paper, West outperforming East, and reversal arb emerging on the horizon

The naphtha market presents a dilemma during the last week, physical prices rising in the Western market, due to petrochemical demand for the second half of July and the rebound in blending activity, while paper trades lower since the beginning of July.

The stronger market is Europe, it has positioned itself as the most efficient gasoline supplier to several markets in Latam, and there are options to blend and arbitrate RBOB to NYH at the beginning of the month.

On the other hand, the backwardation eases down the curve, following the significant rise experienced during June from annual lows.

The crack has also experienced moderate corrections that could increase following the decline in crude stocks in the American market and the upward pressure on crude that the hurricane season in the Gulf of Mexico could unleash.

Backwardation eases down the curve in both Asian and European markets. (Sparta Live Curves)

In Asia, the market is already looking towards the second half of August, with arbitrage widely closed from Europe and E/W has been trending downward for the past fifteen days.

Combined with current FOB European prices and renewed petrochemical and blending demand in EU, we do not foresee spot arbitrage opportunities to Asia in the short term for the remainder of the summer.

We will have to wait until the end of the quarter or Q4 to see a substantial improvement in economics and an arbitrage that could only be incentivized by a correction in the European market and the end of the driving season in the US.

This sense of a tighter Western market compared to the Asian market in the short term has also been reflected in ME pricing.

With the Asian market well covered and not needing imports from the West, physical premiums have dropped by about $5-6/mt, settling around $30/mt for an Asian spec window.

ME market eases on a less tight Asian balance. (Sparta Live Curves)

At this moment, with the West to East arbitrage closed, an interesting dynamic on the horizon is the possibility of a reversal arb to Europe from the Red Sea.

The margin remains closed, but the economics have been gradually improving due to the correction of MOPAG and E/W, and the dynamics of physical premiums in both markets, with Europe rising in both the north and south and a weaker ME.

If the strong European demand for petrochemicals and gasoline continues in the short term, we might see this arbitrage working, maybe necessary to reverse the price escalation in the West.

Reversal arb from Red Sea keep closed, but it has improved $30/mt since 2H June. (Sparta Global ARBs – ARBs Dashboard)

Lastly, focusing on intra-European dynamics, after the recent movements in physical premiums, we currently see a pricing imbalance between the MED and the North, which could lead to a correction in one of these markets in the short term.

MED premiums remain too strong, given that petrochemical demand for August is expected to be lower than in Q2 July, and the increase in blending costs and the rise in TC2 have damaged the economics of gasoline arbitrage in NWE and will likely drag down blending demand.

We see a downward correction in MED premiums in the coming weeks, while NWE still has the opportunity to remain strong on the renewed demand for both sources.

Price imbalance between MED and NWE points to a price correction in the short term. (Sparta Global ARBs – ARBs Dashboard)