Naphtha market skyrockets as Middle East war disrupts supply

Naphtha market skyrockets as Middle East war disrupts supply

E/W Asian and European timespreads trade now close to historical ever highs.

Commentary summary:

• Naphtha E/W has surged above $50/mt for the April contract, more than $30/mt higher since the start of the year.
  
  
• The move reflects concerns over reduced Middle East supply into Asia, where roughly 40 percent of global naphtha exports originate.
  
  
• Naphtha timespreads have tightened sharply, with Apr/May backwardation in both MOPJ and NWE increasing by around $20/mt since last Friday.
  
  
• Asian petrochemical producers are already responding, with Korean and Chinese steam crackers reducing operating rates due to feedstock shortages.

Naphtha has been one of the markets reacting the most clearly to the new risk environment.

The E/W spread has pushed to fresh highs, with the April contract trading above $50/mt, more than $30/mt higher than at the start of the year.

The move reflects the market pricing a short-term lack of supply form Middle East supply into Asia, where a large portion of petrochemical feedstock comes from the Gulf.

  Source: Curves. E/W nap jumps on Iran war pricing a likely rise of western imports needs into Asian outlets.

Timespreads have also tightened sharply, both MOPJ and NWE prompt structures have moved deeper into backwardation in recent sessions, with Apr/May spreads increasing by around $20/mt since last Friday.

Current levels are approaching the upper end of the historical range, with the only comparable period being the start of the Ukraine war in 2022.

Source: Curves. Timpespreads have skyrocketed down the curve in European and Asian markets.

The physical market is starting to show the impact as well. In Asia, several petrochemical producers are already adjusting operations due to feedstock shortages.

Yeochun NCC in Korea has declared force majeure and is moving to minimum run rates, while LG Chem and GS Caltex are also reducing steam cracker utilisation.

In China, operators including FREP, CNOOC and Sinochem are expected to cut operating rates as Middle East supply becomes less reliable.

While it remains difficult to assess how Middle East and Asian premiums will react as trading activity has largely stalled, the impact is also visible in the West, with European freight up around $30/mt on TC6 and physical premiums rising roughly $7/mt.

In US, the MB C5 spread has also climbed to its highest level in the past year, rising about 3.5 cpg since the start of the war. Both Western alternatives have become significantly more expensive, reflecting the cost of potential resupply from Europe and the US in response to lost Middle East supply.

Source: European markets first reaction to ME disruptions.

The LPG complex is adding further pressure to the naphtha balance.

The conflict began only days after the outage at Aramco’s Juaymah NGL facilities was confirmed, which had already driven a sharp rally in FEI propane and pro-nap East.

The loss of prompt LPG supply from the Middle East has tightened feedstock availability across Asia and reinforced the strength seen across naphtha spreads.

Pro-nap East prompt values have rallied aggressively summer levels have softened since the start of the conflict.

Source: Pro-nap East forward curve movement during the last week.

There is still room for further price adjustments as the market works to replace lost Middle East supply.

Asian naphtha prices may need to move higher to ensure that arbitrage flows from Europe and the US into Asia remain open, while propane values will need to continue attracting US barrels east to compensate for the loss of Middle East LPG exports.

As these replacement flows develop, pricing across both markets will likely continue adjusting to maintain the economics required to rebalance supply into Asia.

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