Come together: Surging E/W spread countered by weaker Asian naphtha cash diffs, global cracks and time spreads find ceiling
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Commentary summary:
- Global physical and paper naphtha markets are diverging, with the East/West spread at year-to-date highs, though a reconciliation between paper and physical is anticipated soon.
- Asian cash differentials are declining, while global cracks and time spreads are hitting a ceiling.
- Despite a drop in buy-side activity due to China’s Golden Week, there were several LR fixtures from the Arab Gulf and India to Japan, where naphtha inventories are significantly below historical averages.
- Number of open Med-NE Asia arbs are diminishing, and Asian steam cracker margins are softening, likely reducing petrochemical consumption.
- Despite heightened tensions in the Middle East, eastbound arbitrage via the Cape appears unviable through year-end, indicating a lack of urgency for resupply.
- A decline in TC2 freight rates is attempting to revitalise the Rotterdam-New York Harbor route, but profitability depends on whether Rotterdam FOBs can adjust to forecasted freight increases, amid a less favourable outlook for European gasoline demand.
Global physical and paper naphtha markets continue to diverge with surging E/W spreads that remain within our target range of $5-10/mt above historical averages.
That said, the reconciliation between paper and physical appears imminent. Asian cash diffs continue to tank, while global cracks and time spreads—while volatile—have seemingly found a ceiling.
The sell-side, specifically from the Arab Gulf and India, did fix several LRs, all bound for Japan this week, despite a marked drop in buy-side activity due to Golden Week holidays in China.
Most recently released stock data from Japan show naphtha inventories in August stood at 12.2 mb, well below year-ago levels and nearly 3.3 mb below historical averages. Japanese imports in August were at all-time highs for that time of year as Japanese buyers played catch up with restocking, a trend that continued into September.
(Source: METI)
The surging E/W and lower freight (up to this point) is keeping some Med-Asian arbs open, although these numbers are dwindling with each passing day.
Asian forward steam cracker margins continue to soften, which should quell overall petrochemical consumption, despite the start-up of new plants in December.
Furthermore, the Sparta freight team forecasts upside of $1.60-3.55 (7 and 30 WS) for AG LR1 and MRs respectively, so we remain of the view that freight cannot be counted upon going forward to reopen arbs.
Sparta’s forward steam cracker and PDH margins (Source: EIA)
Meanwhile, amid heightened Middle East tensions, we note that all eastbound arbs via the Cape remain out of the money through year’s end, underlining the lack of resupply urgency.
That said, with the return of several players to their desks next week, it would be unsurprising to see another rally in cracks and time spreads as participants conclude H1 November business and look to the back half of the month. Outside of this potential uptick, ultimately, we expect the complex to soften during the quarter.
In ARA, the recent flat price rally has narrowed regional pro-nap swaps w-o-w, but we ultimately have a more constructive demand outlook for propane relative to naphtha in the near term.
We note that pro-naps swaps look more firmly in naphtha’s favour in November, which is when several regional crackers exit maintenance. Indeed, Rotterdam sales prices have rallied recently on incremental buying needs; regional petchems margins remain profitable into end-Q1 25.
In the US, the freefall in TC2 is attempting to give the Rotterdam-New York Harbor route some signs of life. While our freight team is calling a bottom to TC2 (with a forecasted upside of $0.85 or 5 WS), we note that US sales prices have rallied strongly, largely a function of lower-than-average PADD 1 refinery runs and lighter volumes moving on Colonial.
Whether this route can increase its profitability is highly dependent on whether Rotterdam FOBs can overcome out expected rebound in freight. Based on our less constructive view of EBOB and European gasoline demand, we expect Rotterdam FOBs to do the heavy lifting to find homes for their excess naphtha.
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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