Asian naphtha outlook turns cautiously optimistic, wider E/W spread to encourage more incremental Med flows; ARA upturn dependent on improved gasoline T/A arb

A widening E/W spread has continued to open the door for further incremental cargoes to flow from the Med to Asia with July in particular resolutely breaking from various moving averages.

Indeed, we have already seen an uptick in activity from northeast Asian buyers for second-half July deliveries, which coincides with when steam cracker maintenance is expected to significantly wind down.

The July E/W naphtha spread is now at levels seen in mid-February, allowing further incremental flows from the Med. (Sparta Live Curves)

Despite Med premia remaining fairly unchanged, the wider E/W has combined with slim declines in freight and a rise in MOPJ flat price to reopen eastbound arbs through Q3. (Sparta Global ARBS – ARBs Dashboard)

There are reasons to be cautiously optimistic about the near-term outlook for MOPJ.

Our forward cracker margins show Asian naphtha-fed steam crackers are well above breakeven levels through the summer peak manufacturing season.

Further, August shows little to no steam cracker maintenance planned, which should keep buying activity quite rife.

However, the operative word here is ‘cautious.’ Global cracks and time spreads are still on a downtrend and Asian propane-naphtha swaps are reverting to more historical norms, per our expectations, as Asian PDH margins are still underwater, capping propane consumption and ensuring the lighter feedstock remains priced competitively enough to maintain its status as the preferred feedstock for regional flexi-crackers.

Additionally, Northeast Asian cracker operators smarting from Q1 net income losses are still seemingly willing and able to extend turnarounds—as reportedly Eneos Kawasaski’s unit has done—awaiting a more sustained upturn in downstream petrochemical prices.

Thus, a touch more supply will make its way eastward through Q3 but significant margin upside is unlikely.

Asian propane-naphtha swaps are reverting to more historical norms, meaning naphtha pricing upside will be capped by propane remaining the feedstock of choice for regional steam crackers through at least end-August. (Sparta Historical Forwards)

Europe pricing remains challenged as petrochemical demand for naphtha continues to wane, given the $200-300/t advantage that propane and butane have over naphtha in the steam cracking pool, our forward margins model shows.

But again, there are reasons to be cautiously optimistic. The gasoline T/A arb is exhibiting signs of life, given the start of the US summer driving season on Monday and cheaper European components, meaning gas-nap has likely found a floor.

That said, until the gasoline T/A widens sufficiently to facilitate greater movements across the Atlantic, ARA has little need of near-term resupply and prompt flat price will be unable to overcome rising freight to make that arb workable.

The ARA naphtha complex remains in the doldrums with any upside highly dependent upon a wider gasoline T/A arb. (Sparta Global ARBS – Pricing Centre)

Once again, there is little to report in US markets where inbound New York Harbor arbs remain closed.

Any change in the status quo is likely to come in a week’s time, when EIA’s weekly report displays how well—or not—US gasoline demand fared during the Memorial Day weekend.

New York Harbor continues to be unconcerned about resupply despite the start of the US summer driving season. A jolt to the upside is only likely to come from the EIA’s gasoline demand stats next week. (Sparta Global ARBS – Dashboard)