E/W cools down after overreacting to attack on the Marin Luanda and facilities in Ust Luga and Tuapse; will current values be enough to pay for Asian arb needs? 

The March E/W lost$10/mt during the week as the market corrected itself after the overreaction to last week’s Tuapse/Ust Luga fires and the first attack on a ship loaded with naphtha in the Red Sea.

The fact that the market is adapting to the new route via the Cape of Good Hope indicates that around $25/mt E/W will likely pay for West to East arb in the medium term. 

However, the Asian balance remains tight, especially towards the end of Q1, so there isn’t potential for much larger declines unless normal transit through the Red Sea is restored.

The outlook for Russian exports to Asia is clouded for the coming months following the recent attacks, which should encourage the arbitrage from West to the East. 

It will be challenging to see further declines from E/W as TC15 continues to rise, gaining another $8/mt to reach $55/mt following the ongoing hostilities in the Red Sea.

While the rest of the Western freight rates have returned to pre-January conflict levels, the route from Europe to Asia, TC5, and TC15 maintain intrinsic price risk that will keep physical premiums high in Asia and limit the decline of E/W, potentially leading to new increases in the short term. 

A similar situation is observed in cracks, primarily in the spreads of Europe and Asia. After the correction of both benchmarks, backwardation persists, and the curves have flattened through the end of Q2 in both markets. The E/W box remains in the $1-1.50/mt range until the end of the year.  

Given these levels, a new surge seems more likely than a prolonged decline, as by the end of Q1 and the beginning of Q2, supply remains tight due to Middle East refinery turnarounds, coupled with the probable reduction in Russian supply.  

News regarding the navigability of Bab al-Mandab will increase volatility and may lead to greater declines in cracks and spreads, but for the moment, the situation remains similar to the past two weeks. 

Asian pro-nap has radically changed during the last month and a half, experiencing a prolonged decline to reach five-year lows after congestion in the Panama Canal eased.

It has stood as the most profitable alternative as a feedstock for flexi crackers but rising LPG prices and a naphtha downtrend during the week have threatened this position for Asian flexi crackers.

It remains near five-year lows, but LPG’s recent rebound and additional declines in Asian naphtha prices could increase its demand for petrochemical production. 

USGC and NYH aromatic components remain bullish as the American market continued to strengthen, especially in heavy naphtha. NYH remains the destination with the best margin for heavy naphthas from NWE, which is being reflected in the strength of TC14. 

The heavy market has also strengthened in Asia in the last few days but Sing 92 cracks are already coming off their recent highs, with spreads also giving up some of their gains in the last few days. 

The overall picture for blending demand is healthier with NYH and Asia pushing for more barrels while E10 blending margin remains wide open in Europe for the end of quarter and Q2.

Gas-Nap and RBOB-C5 has continued to rally and we expect blending qualities will remain stronger in the short-term. 

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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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