Brent collapse boosts naphtha cracks while Panama delays impact Asian propane-nap spreads and eastbound arb prospects 

The collapse of brent crude, which has lost over $5/bbl in the past week and $10/bbl in two weeks, is shaping the current dynamics of the product market.  
 
After erasing all the gains driven by geopolitical risk in the Middle East, which threatened supply disruptions, the perspective has shifted towards concerns about demand and poor macroeconomic data, not least from China and its outlook for Q4. 
 
The impact on the naphtha market has been immediate on the crack spread side. Despite the continued decline in the flat price, the correction in Brent has led to a $4 per/mt  increase in NWE naphtha cracks. 

The deteriorating outlook for the Asian market initially caused a correction on the E/W spread at the beginning of the week, though it is now trading back close to monthly highs for December and January.

These levels increase the potential for more barrels of HFRN and OSN from the Mediterranean to flow to Asian outlets. 
 
Throughout the week, shipments destined for Asia have been reported, mainly for the HFRN quality, whose (strong?) premium versus OSN continues for another week.

Despite a slight increase in freight costs and a short term weakening of the E/W spread, we could see more shipments heading towards Asia in the short term if the premiums in the north do not improve amid a new round of spot petrochemical demand that increases the differential between the MED and NWE. 

During the week, we have seen an improvement in gasoline blending economics in Europe as pressure from the aromatic side has eased, and despite the moderate drop in Gas-Nap. The short-term expectation is an increase in activity in NWE that could push heavy naphtha and LVN premiums higher. 
 
Reformate, which makes up close to 36% of E5 blend and almost 50% for E10 blend, has lost $14/mt  on NWE prompt physical premium since the beginning of October, providing a substantial decrease in blend costs and opening up the blending market for both qualities during the last week. 
 
(Sparta Live Curves)

The delays in the Panama Canal and potential winter restrictions on USGC exports to Asia create an interesting story for the naphtha market—support for Asian propane and challenges in closing arbitrages from the Gulf to the Asian market. 

Analysing pro-nap values between Europe and Asia, the European dynamics show a significant discount to LPG, suggesting a scenario where maximising propane in steam crackers will persist.

A considerable portion of the volume destined for Asia could find easier outlets in Northern Europe – at least temporarily – if the delays persist in the coming weeks.

In the Asian market, pro-nap is trading higher, anticipating a tight market in the winter, supporting naphtha as a more economical supply for crackers. 

Regarding naphtha exports from the Gulf to Asia, the increase in premiums for heavy naphtha in Asia, aimed at keeping the arbitrage open from the West, leaves the arbitrage open on paper, although it is challenging to materialise with the current delays. 

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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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