E/W naphtha to remain wide but fall short of record highs as Asia weakens and Europe threatened by near-term gasoline weakness; US to further soften amid lacklustre domestic demand

The E/W spread for the remainder of Q2 has narrowed considerably from the highs of mid-month as an initial burst of Asian buying has petered out.

Despite chatter of a shortfall of UAE naphtha availability through at least end-June amid a changing Adnoc crude slate, Asian naphtha markets continue to be challenged by unprofitable steam cracker margins and resulting extended turnarounds.

Indeed, the continuance of maintenance at the naphtha-fed steam crackers at Pengerang and Long Son, compounded by Sinopec’s apparent willingness to reduce ethylene output in Q1 has cast a bearish shadow on regional markets, implying a continued narrow E/W spread into early Q3. 

The lack of urgency for inbound product, no matter the grade, is fully reflected in most arbs —outside of a handful from the Med—being out of the money for Asian destinations through end-Q3. 

Softer Asian demand and near-term firmer ARA pricing should narrow E/W spread. (Sparta Live Curves)

(Sparta Global ARBs – ARBs Comparison)

Handful of Med suppliers are only profitable routes into the Far East, indicating retracing Asian naphtha demand. (Sparta Global ARBs – Pricing Centre) 

While a firmer European naphtha complex will certainly contribute to a narrower E/W going forward, NWE pricing should soon face challenges of its own.

While the ongoing wide gas-nap spread has continued to put a firm floor of support on European prices, ensuring European refiners and blenders squeeze as many naphtha molecules as possible into their gasoline blend (as elaborated upon at length in our most recent gasoline market commentary) there is cause for concern from the petrochemical sector.  

Although European petrochemical companies recently reported some of their sector’s best quarterly earnings in more than a year, the tacit understanding is that these have come from low downstream product inventories and choked-off Asian imports due to Red Sea tensions.

We understand these inventories are now returning to more historical norms, leaving European petchems firms to face underlying economic and consumer goods weakness once more. Concurrently, our near-term European gasoline outlook given the end of seasonal maintenance this month, is similarly soft. 

Thus, as historically wide as gas-nap currently is, our outlook for the spread is to remain fairly rangebound in the near term, given expectations of price support erosion from petchems. 

Gas-nap currently wider than average, but unlikely to surpass record levels seen after sanctions on Russian products in February 2023. (Sparta Historical Forwards)

After last week’s sharp ascent in US natural gasoline and naphtha prices—largely a function of end-month book-squaring—this week’s swift correction has done little to price USGC material more competitively into most markets.

Meanwhile, the New York Harbor market remains unconcerned about resupply through Q4, which is unsurprising given the swath of weak fundamentals—higher y/y PADD 1 gasoline inventories and lower y/y gasoline demand—and pricing. As such, we remain bearish in the near-term on the US naphtha complex. 

NYH remains an unattractive destination for naphtha given seeming lack of need for resupply for components, as well as gasoline, given soft demand and rising stocks. (Sparta Global ARBs – Pricing Centre)