FOB off: Med cash diffs soften with freight to reopen key naphtha arbs to NE Asia, ARA

Med FOBs have come off sufficiently to pry open some arbs to both east and west through November delivery—with the notable exception of Skikda-origin barrels for October—working in tandem with falling freight rates.

We understand naphtha export availability has improved from the downturn in the gasoline complex and a narrower gas-nap spread with the summer driving season in Europe and the Med effectively over.

Med refinery output should also increase in October given lower y/y turnarounds, which aligns with arbs becoming increasingly profitable for October and November deliveries into Northwest Europe and northeast Asia, respectively.

Lower Med FOBs have combined with lower freight to reopen key arbs to NWE and Asia. (Sparta Live Curves)

In contrast, AG FOB prices have rebounded from year-to-date lows, ensuring already shut arbs remain firmly so through year’s end. We see limited downside price risk for AG FOBs given higher y/y refinery maintenance in September, which then intensifies m/m in October.

Additionally, the MOPAG/MOPJ spread is only a touch stronger than reasonal averages, also indicating little room for substantial declines. As such, despite a recent uptick in spot offers from Mideast suppliers, we expect incremental cargoes from the Med to remain more competitive into Asia through end-Q4.

Despite a recent rally in freight rates, we still believe there is still room for more downside, which could mean increased profitability for already open arbs.

The Sparta freight team’s view is that overall vessel supply remains ample with Northwest Europe needing to absorb substantially more MRs before it become a buy, while the 15-day LR window out of the AG looks long.

Indeed, the Sparta platform indicates that world scale for the AG-Far East freight route would have to drop about $15 before that route becomes viable on an LR2.

Ultimately, we maintain that freight will do much of the heavy lifting to reopen arbs in the near term, but it will be up to FOB prices to keep those arbs open going past the prompt and near prompt months.

AG FOBs have recently rebounded despite a spate of spot offers from some Mideast suppliers. Coupled with TC5 attempting to find a bottom, AG cargoes look out of the money through end Q4. (Sparta Live Curves)

That said, there is window where Asian sales premia could help to reopen some arbs in the near term.

MOPJ briefly flirted with contango last week but swiftly returned to its more seasonal backwardated structure with the curve steepening at the front amid an uptick of liquidity in the spot market.

We have noted for a while now that October will see higher y/y refinery maintenance in northeast Asia, while steam cracker works are expected to be much lower y/y, requiring a greater pull from waterborne markets.

Despite softer steam cracker margins, naphtha is being clearly signalled as the preferred feedstock over LPG both in regional propane-naphtha swaps and in our Sparta forward margins.

Sparta’s forward steam cracker and PDH margins. Although naphtha is more profitable to crack than LPG in Asia, forward cracker margins are around breakeven levels, which should limit substantial upside in Asian cash diffs, particularly when regional refinery maintenance ebbs in early Q4. (Sparta Live Curves)

As a result, E/W has rallied hard this week, surpassing its historical average of $20/t by midweek. Indeed, most of naphtha’s major swap instruments—E/W, gas-nap, naphtha cracks—are nearing or have exceeded historical averages.

As we expected, prompt and next-month Asian and European cracks are coming in at year-to-date highs and are now slightly stronger than historical averages, where they are likely to remain given the abovementioned dynamics.

Prompt and next-month Asian and European cracks are coming in at year-to-date highs and are now slightly stronger than historical averages. (Sparta Historical Forwards)

In contrast, the distinct lack of appetite for naphtha in US markets has been quite evident as the Houston-Rotterdam light arb opened for the first time since March on an MR for September delivery, albeit briefly by midweek.

Heavy material continues to be in the money for October delivery and we have seen several TA fixtures this week, which could help TC14 find a bottom.  

Meanwhile, the USGC-New York Harbor route for light barrels remains firmly in the red for the next several months.

Barring any unexpected supply shock, PADD 1 gasoline blending appetite should remain lacklustre given the imminent switch to the winter spec in the coming weeks and as PADD 1 gasoline stocks remain well above historical averages.

As such, USGC FOBs could see further softness as these barrels seek out alternative homes in the coming months.

 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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