Guess who’s back? Critical naphtha arbs sustainably open on softer FOB premia, although Med, ARA refinery issues could erode margins

Global naphtha flat prices, spreads and cracks have continued their upswing, supported by resilient Asian appetite and supply-side issues in the Med.

The August East-West spread continues to steadily inch higher, in line with our view of increased pulls from regional steam cracker operators as maintenance fully winds down in that month.

Rotterdam-New York Harbor route has broadened its profitability at the prompt and into August deliveries. (Sparta Global ARBS – Dashboard)

AG-Yeosu/Chiba arb barely hanging on in the green for September deliveries amid rising LR1, LR2 freight and as Mideast FOB premia gains outpace those in Asia. (Sparta Global ARBS – Dashboard)

However, there are some near-term risks to note. Previous softness in both Med and ARA FOB premia has been recently countered by record heat that has crimped operations at some refineries in both regions.

That said, with regional summer driving demand yet to fully kick in, it seems reasonable that these premia will soon find a ceiling. Our freight team has also noted that any recovery in TC2 freight will be limited given an increased amount of USAC-NWE middle distillate backhauls, which is often a bearish signal for TC2.

Finally, given closed arbs into Rotterdam for nearly every source save Bonny Light, there is ultimately greater incentive for Med suppliers to price themselves more competitively into ARA, on top of keeping themselves as the swing supplier of choice into the Far East. 

Rising Med premia, relatively weaker ARA complex has kept only Bonny Light barrels as viable inbound cargoes into Europe. Given European summer driving season has yet to kick in, Med premia’s upside is likely to be soon capped. (Sparta Live Curves)

Meanwhile, some of the declines on the MR freight side are being picked up by gains in the LR1 and LR2 complex, which has made August deliveries from the AG to the Far East unprofitable yet again.

We reckon there is far more risk of these arbs falling deeper into the red, potentially marring September deliveries as well.

For one, we maintain our view of only incrementally stronger pulls for naphtha from the Asian petrochemical sector given the state of Asian propane-naphtha swaps, which have whipsawed back to signalling propane as the more favourable feedstock until October.

We remain of the view that AFEI-MOPJ for Q3 will continue to trade around $5/t on either side of the switching threshold of $50/t.

Sparta’s forward steam cracker and PDH margins for Asia. These now signal AFEI propane as being more profitable to crack than naphtha. Asian PDH margins remain deeply in the red, meaning any significant AFEI price upside is likely to be capped by lower PDH operating rates in the region.

This means the onus of reopening these arbs would primarily fall on Mideast FOB premia. We struggle to see this happening sustainably, given OPEC+’s adherence to its production quotas through end-Q3, similar refinery supply issues due to heat and some diversions of AG naphtha to Mideast steam crackers.