Nap time: Global cracks to remain strong, particularly in the East, as resupply concerns still dominate

The correction in the global naphtha complex has continued this week with flat prices hitting their lowest levels since June early in the week. 

That said, there is still much to be bullish about naphtha’s near-term outlook. Global naphtha cracks continue to be the complex’s strongest performer, coming in at their strongest levels for the year to date. 

Global naphtha cracks continue to go from strength to strength amid heavier y/y NE Asian refinery works, light steam cracker maintenance y/y and pricey propane. (Sparta’s Custom Charts)

We maintain our position that cracks should remain historically strong—particularly for MOPJ—through early Q4 given heavier y/y NE Asian refinery works in October and light steam cracker maintenance y/y through end December.

Additionally, propane remains extremely pricey relative to naphtha in Asia, as evidenced by an exceedingly tight East pro-nap swaps that are at winter-like levels. 

October E/W is still coming in about $5/mt stronger than historical norms and should remain so until after Northeast Asian refinery maintenance ebbs in mid-Q4 as regional buyers remain concerned about near-term resupply. 

October E/W is still coming in about $5/mt stronger than historical norms and should remain so until after Northeast Asian refinery maintenance ebbs in mid-Q4. (Sparta Historical Forwards)

In Asia, rebounding sales prices amid several steam cracker restarts and above-mentioned NE Asian refinery works have reopened the eastbound arb for Ruwais and Skikda splitter material. The latter has been out of the money since June. 

Despite these resupply anxieties, we remain cautious about naphtha’s outlook beyond the near term, given the ongoing deterioration of forward steam cracker margins, which are projected to remain below breakeven levels through year’s end.

As such, we continue to expect volatility in these arbs’ profitability, particularly for October deliveries. 

Arbs, Sparta forward steam cracker and PDH margins. Rebounding Asian sales prices amid several steam cracker restarts have reopened the eastbound arb for Ruwais and Skikda splitter material. However, Asian forward steam cracker margins are now below breakeven evens through year’s end, which could ultimately soften Asian sales prices once refinery works ebb. (Source: EIA)

Freight continues to play a critical role these reopened arbs with TC5 dropping to its lowest level this year. Even so, the Sparta freight team maintains that AG freight—particularly for LR1s — will rebound as vessel supply is significantly below average in the 7-10 day window.

This was likely exacerbated by a spate of AG-Japan fixings so far this week. 

In Europe, a precipitous drop in freight has been insufficient to prevent further arb shutdowns as Med FOBs were boosted by refinery turnarounds and better arb economics to the East.

That said, Sparta’s gasoline team continues to call for a bottoming out of the Eurobob complex, which should ultimately stem declines in ARA sales prices. 

A significant drop in freight rates have been insufficient to prevent further arb shutdowns as Med FOBs were boosted by refinery turnarounds and better arb economics to the East. (Sparta Global ARBS – ARBs Comparison)

In the US, there remains little urgency for resupply into New York Harbor beyond domestic barrels, mirroring the shut arbs on the gasoline side.

With the summer driving season well and truly over after US Labour Day earlier week, the situation should see little change heading into stock build season. 

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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