Gold(en) rush: Naphtha fixture frenzy ahead of Asian holiday defies closed arbs, props up cash diffs and E/W
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Commentary summary:
- Upcoming Golden Week holidays in China have led to a surge in Asian fixtures from the AG and the Med.
- This has tightened front-month markets, boosted MOPJ cracks and widened the E/W spread.
- Anticipation of lower liquidity next week should see a return to recent downward market trends.
- The profitability of the Skikda-northeast Asia route via LR2 has fluctuated due to increased Asian activity and supported sales prices.
- This arb is expected to close once Asian cash differentials resume weakening.
- NWE markets looking more constructive as a surge in propane prices is increasingly making naphtha look like the most cost-advantaged steam cracker feedstock in the region.
- Despite our slightly more constructive RBOB outlook, New York Harbor continues to signal no urgency for naphtha resupply.
The onset of Golden Week holidays next week in China has resulted in a frenzy of Asian-bound fixtures, despite most Eastern arbs being closed outside of a handful of Med sources.
This rush of activity has tightened front-month markets, boosting MOPJ cracks and widening the E/W spread.
We had cautioned at the start of this week that while fundamentals in Asia remain soft—our forward steam cracker margin calculations show naphtha-fed units declined $28-32/mt through end-Q1 25, remaining unprofitable through February—the return of players to their desks after the mid-Autumn festival last week would see a rush of activity, ultimately propping up the naphtha complex.
This is indeed playing out as several fixtures from both the Middle East and the Med to the Far East were hastily booked by mid-week.
Sparta’s Asian forward steam cracker and PDH margins. (Source: EIA)
We expect markets to trend downward again next week as several players take off for Golden Week, leaving Asian markets, in particular, fairly illiquid.
Our newly launched Sparta freight tool also suggests the market has become a tad overheated of late, signaling impending weakness in AG-Far East (TC5) routes by as much as $0.75/mt, or a downside of 3 WS, as the run up in TC5 rates has now made arb levels less attractive.
We noted earlier this week that the Skikda-northeast Asia on a LR2 become unprofitable largely on Med FOB support. As part of the bump in Asian activity and sales prices, that has since reopened.
However, as mentioned above, we expect that arb to close again, even with our expectations of lower freight, once Asian cash diffs weaken.
While we note that recently economic stimulus measures in China have lifted some petrochemical and feedstocks prices there—more so on the metals front, although anything that would support real estate/construction would necessarily trickle down to plastics and hence, petrochemicals—this appears to be but a knee-jerk reaction to any good news coming out of the country.
Pragmatically, there should be an expected lag of several months before actual support manifests in those sectors and lifts the petrochemical complex.
This is likely to occur in January/February, given peak construction season in China is bookended by Lunar New Year and the start of the rainy season.
That said, the structure of naphtha markets is telling. Backwardation at the front of the curve continues to come off, both in MOPJ and NWE curves, in yet another signal of looming weakness.
That said, there are some positives to be found in ARA. Regional pro-naps are darting around the switching level of $50/t–which is more of the seasonal norm at this time of year–at which time more naphtha be consumed by steam crackers in the region.
Moreover, given several NWE flexi-crackers are exiting maintenance in late October, it would be an opportune time for naphtha to become the most cost-advantaged feedstock.
Fundamentals are stronger for regional propane, given early heating demand and ongoing prestocking, meaning despite curtailed Med supply and reported spec issues propping up Med FOBs premia, naphtha is still well poised to entice petchems buyers to make the switch next month, and more widely in November.
There is little to report on the US side, given the seasonal demand lull and the continued lack of urgency of inbound cargoes into New York Harbor.
Hurricane Francine appears to pose no threat to refinery production, although we note a pullback in PADD 3 run rates last week, a function of some light turnarounds beginning in the area.
USGC heavy cargoes remain very much in the money for sendout to Asia in November.
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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