Bull-etproof: Global markets’ sharp correction dents naphtha strength

Naphtha’s bull run for flat prices, time spreads and cracks were sharply checked this week as the gasoline complex collapsed and near-term steam cracker margins in Asia dipped below breakeven levels ($150-250/t). 

Global naphtha time spreads have narrowed considerably on gasoline softness, Asian steam cracker margin weakness. (Sparta Live Curves)

Gas-nap has plummeted to below historical averages, sending available Med supply scurrying to find more profitable homes in the East, where petrochemical buyers have been eager to buy to fill the expected feedstock shortfall from expected heavier y/y refinery turnarounds in the region through October.  

Sparta’s gasoline call is for EBOB to soon find a floor given autumn turnarounds and rising exports of European gasoline into WAF and LatAm, meaning limited downside to gas-nap in the near term. This should translate into incremental improvements in already open naphtha arbs from Cartagena and the USGC.

On the petrochemical side, European steam cracker margins have recently rallied and look well above breakeven levels over the next few months, which should encourage operators to run their assets harder, thereby increasing the call on waterborne imports.  

European steam cracker margins have recently rallied and look well above breakeven levels over the next few months, which should encourage operators to run their assets harder. (Source: Sparta’s Steam Cracker Margins)

Still front-of-the curve spreads remain at their most backwardated in several months, while cracks are still well above historical averages, especially in Asia, meaning resupply concerns for that region continue to dominate market action. 

That said, we’ve cautioned for some time that there is a short-term window in which Asian sales prices help reopen arbs but may not be relied upon to sustainably do so, especially once regional refinery turnarounds ebb and Asian steam cracker margins drop below breakevens.

This dynamic was evident this week as the Ruwais-Chiba/Yeosu route for light material on an LR2 reopened for the first time since mid-July on lower FOB and freight values. Yeosu November arbs promptly slammed shut as Asian sales prices dropped precipitously. 

While Med barrels remain the most profitable into east Asia, we would sound a warning note. The Star refinery in Turkey is expected to go down for maintenance in early September for about two months, its first major turnaround since the complex was commissioned nearly six years ago.

These works and subsequent shifting trade flows could threaten Aliaga’s status as the cheapest landed barrel into northeast Asia through mid-Q4. 

Furthermore, the returning weakness in Asian cash diffs particularly for light and OSN barrels—and risk to the upside for Med FOBs through October—is likely to slightly narrow the E/W spread, which is currently about $4/t stronger than average. 

The Ruwais-Chiba/Yeosu light arb reopened for the first time since mid-July but slammed shut for Yeosu November the next day as Asian sales prices dropped precipitously. (Sparta Global ARBS – Dashboard)

The October E/W spread is about $4/mt stronger than average and should narrow to historical norms in the coming weeks. (Sparta Seasonals)

Meanwhile, Saudi-origin barrels remain firmly in the red to Asia and should remain so given the Sparta freight team’s mildly constructive outlook on TC5, given below-average vessel supply. As for the major clean routes of TC2 and TC 14, our outlook is fairly neutral given average vessel supply, meaning sideways price action over the next weeks.  

Ultimately, our view remains that freight cannot be counted on to keep naphtha arbs open sustainably. Instead, FOBs are likely to do the heavy lifting here, particularly in the back half of Q4 after maintenance subsides and ad valorem selling kicks in.  

USGC FOB had a blistering run last week with premia at 7 cpg and around 4 cpg done for balmo and H2 September respectively, all reportedly bound for Brazil.

We understand there were some logistical issues out of the USGC export terminal that boosted cash diffs as well, ultimately leading to sharply higher C5 prices to end the week. Interestingly, the Sparta platform notes that the cheapest barrel to land into Brazil are Bonny Light on an LR 2, with USGC light sweet on an MR about $85/t more expensive.

This could perhaps signal distressed some short-term operational issues at Brazilian refineries, meaning last week’s price support should dissipate. 

USGC FOB prices got a short-term boost from export terminal logistical issues and possible refinery issues in Brazil. FOBs should continue to weaken from here on out. (Sparta Custom Charts – Combo Chart)

Samantha Hartke, a veteran in commodity management, boasts substantial expertise in energy analysis and product management. In her role at Energy Aspects as Head of NGLs, she analysed global natural gas liquids markets. Previously, at PetroChem Wire, Samantha provided high-quality analysis of North American NGLs and olefins. Her expertise also extends to leading the commercial and operational aspects of IHS Chemical’s daily business information service.

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