Free fallin’: Softer naphtha prices have improved Asian steam cracker margins, firmed import appetite

Flat prices rebounded slightly after falling to seven-month lows earlier this week but remain at levels last seen in June. That said, these recent declines have allowed Asian forward steam cracker margins to rebound to breakeven levels.

Our conversations at the APPEC conference in Singapore further revealed that while concerns about Chinese demand linger, there is little near-term incentive to significantly rein in petrochemical plant operating rates until the seasonal demand lull of late Q4/early Q1 kicks in.

We note that integrated polymers margins remain quite profitable as well. 

Sparta’s Asian forward steam cracker and Asian margins. Lower naphtha prices have allowed these cracker margins to sharply rebound back into breakeven territory, minimising the potential of significant plant operating rate cuts.

MOPJ has been particularly strong over the last few months with front-month cracks now at levels last at three-year highs. (Sparta) 

Thus, with crude in freefall—meaning naphtha cracks should remain at multi-year highs—amid this backdrop of firm petrochemical feedstock appetite, our short-term constructive view of naphtha, particularly in Asia, holds. Indeed, we note that MOPJ turned positive early Thursday, the first time it has done so in more than three years. 

Another key talking point at the industry event was lower refinery utilisation rates on a global scale given weak product margins, with either in the form of trimmed runs or extended turnarounds, which likely has exacerbated some Asian buyers’ ongoing resupply concerns.

If these should indeed materialise past early Q4, we would then extend our constructive view into early December at least. In the interim, we note that E/W spreads have widened to our target of $5-8/mt above historical averages. 

E/W spreads have remained above historical averages and are now coming in at our target range of $5-10 above seasonal norms. (Sparta Seasonals)

Gas-nap has also rebounded in line with recovering EBOB as our gasoline colleagues have called for, although this is largely being reflected in EBOB spreads rather than flat price.

Granted, while demand has long past its summer peak, any incremental demand from blending shores up our constructive view of naphtha, as it lessens its reliance of petrochemical consumption as being the lone solver for the complex. 

With many market participants away from their desks for APPEC, physical market activity did not stray too far from previous week’s levels. Thus, the more significant price actions have taken place in paper rather than physical markets.

However, the continued rash of fixtures from the AG to the Far East, and more recently, the spate of loadings from India has softened Asian sales prices. Even so, although FOBs have maintained their upward trend amid curtailed refinery output, most key arbs from the Med to Northeast Asia remain open.  

Asian sales cash diffs have softened amid the recent abundance of supply coming in from the AG and Skikda but chatter of extended refinery maintenance and trimmed cuts cut reignite supply fears past October. (Sparta Live Curves)

West of Suez physical naphtha markets are not mirroring the signs of life recently on display in paper gasoline markets. Rotterdam and New York Harbor continue to show no urgency for resupply for the rest of the year.   

Indeed, although European naphtha steam cracker margins have risen about $260/t m/m, propane remains the more profitable feedstock to burn, limiting naphtha consumption and demand upside. Furthermore, several major crackers in Germany are now going down for turnarounds, which should boost olefins values but provide little price support to ARA naphtha. 

Rotterdam continues to signal little urgency for resupply through year’s end, keeping the supply side looking toward Far East markets to find homes. (Sparta Global ARBS – Dashboard)

In the US, Hurricane—now Tropical Storm—Francine has done little to stem US naphtha’s downward turn. Greater disruptions were seen on offshore oil and gas production and crude exports, while ExxonMobil’s Baton Rouge and Shell’s Norco refinery complexes had lowered rates and were operating with barebones ridethrough crews.

With at least one of the Louisiana refineries in Francine’s path slated for maintenance by month’s end, the chatter is on about whether lower-for-longer run rates are on the card. Although Houston ports had closed ahead of the storm, they are expected to reopen early Thursday morning, meaning no impact on exports. 

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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