Despite robust demand, the current dynamics of the physical market and the correction in Asia point to the end of the upward trend in Europe

25 July 2024 Time to read:  minutes

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Prompt strength in the European market has been sustained by a rebound in blending naphtha prices, stable petrochemical activity, and a tight supply balance due to several refinery outages, as we noted last week.

However, several factors suggest that the peak of the current trend may be nearby.

Indeed, the Asian market has already seen a drop in physical premiums and timespreads, with a lesser impact on the crack spreads due to the recent sharp correction in the crude market. 

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European market keeps trading higher on timespreads and crack, while Asia shows the first signs of correction. (Sparta Live Curves)

Tightness on the blending component side is contributing to sustained premiums for LVN and heavy naphtha, despite the limited European blending options.

Currently, the option to export EBOB is closed, and the increase in TC2, along with the rise in blending costs and lower gas-naphtha, keeps the pressure on the European gasoline market, so we don’t expect a big rally in the coming weeks. 

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Tighter blending naphthas in Europe, keep outperforming petchem ones during the last weeks. (Sparta Live Curves)

The arbitrage to Asia remains closed due to a tight European market that will retain as much supply as possible through to the end of summer.

Petrochemical demand continues to outperform expectations, bolstering OSN premiums in Northern Europe.  

However, the correction in Asian premiums for the first half of September, coupled with the decline in the prompt E/W spread, suggests that arbitrage is unlikely to be viable in the short term.

Nevertheless, looking at the E/W down the curve, it has strengthened in recent weeks, improving the prospects for Q3 this year, where we should see increased import activity from the Asian market. 

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Arbitrage to Asia falls on lower E/W and Asian premiums decrease. (Sparta Global ARBS – Pricing Centre)

It is also likely that we will see a less tight European market on the physical side.

Currently, with the arbitrage to Asia closed and limited blending and export options for gasoline from Northern Europe, we should witness a correction in premiums due to the threat of oversupply.

Additionally, with the economics from USGC having significantly improved in recent weeks, the likelihood of seeing American sour C5s in September is high, which should help to calm a very bullish market. 

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USGC arb to NWE keeps improving for Light and Heavy naphthas,  opening up options for September arrivals. (Sparta Global ARBS – Pricing Centre)

In summary, despite the current strength of cracks and spreads, the physical market suggests a potential correction globally.

The worsening arbitrage economics to Asia will increase pressure on the European market, the outlook for gasoline exports in the West is weak, and the arbitrage of light naphtha from the USGC is a real option in the short term.

These factors allied with the bearish trend in the Asian market and the expectation of below-average cracker turnarounds in Asia in Q4 suggests there are more reasons to anticipate at least a ceiling in the market’s upward trend, if not a correction. 

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Jorge Molinero is a Commodity Owner 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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