Asia keep pushing for more barrels but the end of Q1 looks less tight 

21 December 2023 Time to read:  minutes

This week the focus has been on tension rising in the Red Sea due to Houthi attacks. This has impacted cracks in Europe and Asia, which have recorded the most significant drop since October driven by the geopolitical rally in crude.  

Naphtha crack fails on the climb towards its average, Red Sea tensions adding a boost to crude in the prompt. (Sparta Historical Forwards)

The spreads have remained strong for January-February amid concerns about the lack of supply in Asia in the near term, which could worsen due to maintenance in the AG early next year.  
However, the dynamics for the end of Q1 have been quite different, with significant drops in Feb-Mar and Mar-April, suggesting that the current market conditions may not last in the medium term.

Either the export levels from the AG will recover, Russia will be able to increase exports to the Asian market or the Asian market may not remain as robust as Q1 progresses. 

Nap NWE Feb-March sharply loses recent strength on the back of decreased tightness expected for end of Q1. (Sparta Live Curves)

On the physical side, Asia continues to lift new cargoes from the MED, primarily Skikda and East MED cargoes, amid the decline in exports from the Middle East.

At the beginning of the week, the prompt E/W surged above $37/mt to offset the rise in freight prices bound for Asia due to the risk that Red Sea shipments may need to route via COGH, a roughly two-week deviation.  
Since Monday, we have witnessed a correction in the E/W, particularly significant in Q1 values, indicating that the risk of a total blockade of the Red Sea is not as high as reflected in early-week prices. The need to import cargoes from Europe may not be as elevated, especially towards the end of Q1. 
Despite this recent decline, the realisation of shutdowns in the AG will continue to exert pressure on prices in Asia at the beginning of the new year.

The potential drop in the E/W is limited, especially considering possible escalations in the Red Sea that could impact freight prices to Asia or the need to find and price new routes. 

Arbs from Europe to Asia. (Sparta Global ARBs – Pricing Centre)

On the gasoline side, the recent improvement in European blending economics and the rise in Gas-Nap have dragged down blending premiums, coupled with the reopened arbitrage from NWE to NYH, as we indicated last week.

While we do not anticipate a return to the heavy naphtha prices seen earlier this year, blending could provide support to the already tight naphtha market in the coming months. 

Arb from NWE to NYH. (Sparta Global ARBs – Pricing Centre)

Finally, as we approach the new year Asia will continue to pull more naphtha from the West due to reduced supply from the Middle East.

Despite the reduced delays seen this week in Panama, American products will still face challenges reaching Asia, particularly relevant in propane during the winter season.

As a result, European prices will remain under pressure from the East-bound arbitrage unless Russia can increase exports even more than December values and alleviate the tightness in the East. 

Jorge Molinero is Commodity Owner for Naphtha and LPG at Sparta. Starting his career as a financial analyst with BBVA, Jorge quickly transitioned to market intelligence within the energy sector, spending 4 years as a naphtha analyst with Repsol before joining Sparta in early 2023.

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