Do the Tussle: Freight volatility briefly opens and then shuts key arbs; narrow summer Asian pro-naps signal naphtha steam cracker advantage

Global naphtha cracks, flat prices and time spreads are sharply correcting as appetite for naphtha as a petrochemical feedstock picks up pace—particularly in Asia—and a mildly constructive outlook from the Atlantic Basin gasoline sector has emerged.

Coupled with a sharp decline in freight rates, several key arbs briefly reopened early this week—namely Rotterdam-New York Harbor and Ruwais-Far East—marking the first time they have done so in about a month.

However, our freight team did warn that clean freight would bottom out swiftly, meaning the onus has returned to either FOB or sales values to do the heavy lifting to reopen the arb.

Global naphtha cracks, time spreads rebound on rising incremental petrochemical appetite, mildly constructive gasoline blending outlook in Atlantic Basin. (Sparta Live Curves)

Plummeting TC2 and TC5 were the primary drivers behind reopened arbs from Rotterdam to New York Harbor and Ruwais to Far East, but the expected bottoming out and rebound has swiftly rendered those routes unprofitable yet again. (Sparta Live Curves)

We are cautiously optimistic that FOB values have a greater incentive to remain competitively priced to ensure prompt and August arbs to the East become sustainably workable, largely on our expectations of continued strong runs in the Med and returning output from NWE refineries exiting maintenance from the second half of this month.

Additionally, PADD 1 gasoline inventories remain very stout, meaning any upside from NYH sales prices will ultimately be capped.

Recovering freight has also put the Cartagena-Rotterdam route out of the money, meaning only WAF material looks workable into ARA ahead of the summer driving season. (Sparta Global ARBS – Dashboard)

But the softening of the overall naphtha complex in ARA has also meant that even incremental cargoes from Cartagena—albeit of open spec material—are now out of the money for a route that has been profitable since late May.

This leaves only WAF barrels as being decently priced into Northwest Europe to meet early summer gasoline blending demand.

Even sharply recovering New York Harbor sales prices were insufficient to maintain the profitability of inbound ARA cargoes, meaning FOB prices will have to soften in the coming weeks, even as the similar gasoline arb remains open. (Sparta Live Curves)

In Asia, despite the “blink and you missed it” Ruwais-Chiba/Yeosu open arb, we have reason to remain cautiously constructive on our outlook for Asian naphtha over the next few months.

Although MOPJ-AFEI swaps have reverted to more historical norms as we expected, our all-in forward steam cracker margins show naphtha looking more favourable from August and extending that favourability into Q4, as is seasonally typical.

Sparta forward steam cracker and PDH margins. Surging AFEI propane has allowed MOPJ naphtha to price itself more favourably into the Asian steam cracking pool from August. However, capped arb upside—as evidenced by a stalled E/W spread—implies there might only be a mild uptick in Eastbound spot cargoes. (Source EIA)

That said, we continue to expect AFEI propane to price itself to compete against naphtha for its share in the regional steam cracking pool. We have longed warned about ongoing PDH margin weakness and that current stronger PDH operating rates in the region—roughly 10% higher y/o/y—are unsustainable.

As such, we expect Q3 MOPJ-AFEI swaps to remain around $5/t on either side of the $50/t switching threshold, indeed where they currently stand.

Ultimately this leaves our view of a mild uptick in incremental cargoes moving from East to West intact, a view that is validated by largely uncharged arb dynamics, per the Sparta platform.

Med FOB prices have kept pace with the slim declines in Asian delivered values, ensuring arbs for deliveries for August into Q4 remain profitable.

Our view of this slight increase in spot cargoes continues to be cemented by largely unchanged arb dynamics from the Med into Yeosu and Chiba through Q4. (Sparta Global ARBS – ARBs Comparison)