Beryl rhymes with peril: Continued Med, AG naphtha strength shuts down end-Q3 arbs as weakness enters Asian markets

After last week’s volatility surrounding Hurricane Beryl, global naphtha cracks, time spreads and the E/W spread have resumed their upward trajectory.

Flat prices, however, are heading lower, as compromised gasoline blending economics and bearish sentiment in Asian petrochemicals begin to take hold. 

Global naphtha cracks, time spreads and the E/W spread have resumed their upward trajectory. (Sparta Live Curves)

Heat-related refinery issues continue to curtail naphtha output and prop up Med FOBs, despite recent attempts at price corrections.

Similarly, AG light barrels have retained their lofty premia, combining with skyrocketing TC15 freight to close multiple arbs into the Far East—save a handful—through end September.

Arbs closed as of either late last week or early this week include: Skikda/ Cartagena/ Eleusis (via Cape)-Chiba and Ruwais/Skikda-Yeosu. It should be noted that these are for light materials; sales prices for heavy barrels remain well-supported by returning refinery capacity and the uptick from driving season.

Recent price corrections on some Med FOB premia have been insufficient to counter rising freight and faltering Far East sales prices, closing several of the arbs to northeast Asia. (Sparta Live Curves)

There is further reason to be concerned for these light barrel arbs. Far East sales prices are coming off their recent highs and market soundings from our pricing analysts in Singapore indicate the sentiment is turning bearish for Asian naphtha, particularly from the petrochemical sector, as the market begins September business.

While Northeast Asian forward steam cracker margins are well above breakeven levels with naphtha-based units poised to become more favourable than propane from November and these naphtha margins have increased by about $20/t since the start of July, September and October represent lull periods in the manufacturing season. 

Further, we note maintenance for northeast Asian steam cracker through early Q4 looks lighter y-o-y, meaning downstream petrochemical prices could well come under further downward pressure, narrowing these margins even more.

Effectively, sales prices are expected to give way in the weeks to come.

Sparta forward steam cracker and PDH margins. Asian naphtha becomes the more profitable feedstock for the steam cracking pool from November. That said, Asian petchems players are becoming increasingly bearish for the manufacturing lull months of September and October. (Sparta Historical Forwards)

In contrast, rising sales prices for heavy and open spec material for Rotterdam has recently opened these arbs from Cartagena and the US Gulf Coast respectively, likely on recent EBOB strength, helped by a slight correction in TC 14 freight after the initial scare of potential export impacts of Beryl wore off. 

(Sparta Global ARBS – ARBs Comparison)

Finally, the Rotterdam-NYH margin keeps falling as we expected, as PADD 1 gasoline stocks remain above year-ago levels and US gasoline stunningly showed a w-o-w drop for the bellwether July 4th holiday weekend.

Given the open waterborne arbs out of the US Gulf Coast and reported available line space on the Colonial Pipeline, this arb could remain shut down for the near term.