Short-term pressures on Europe, but will it last?

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Commentary summary:

• The E/W spread has moved lower from yearly highs but the uptrend may not be finished.
• Despite rising premiums, cracks and spreads remain stable due to the lack of responses in the Middle East.
• Current blending dynamics could push EBOB prices higher, with gas-nap facing $50/mt resistance.
• Transatlantic arbitrage improves, suggesting some blending cargoes could head to the US.

The last week in the naphtha market has shown high volatility, driven by the current instability in the Middle East, which led to an increase in premiums in the Asian market to secure arbitrage from the West due to the potential shortage of product in the medium term in the Asian market.

However, through the week both cracks and spreads have corrected downward, currently standing close to the levels before the Iranian attack, although flat prices remain elevated due to the geopolitical risk premium.

Timespread movement in EU and Asia after the Iranian attack to Israel. (Sparta Live Curves)

The dynamics of arbitrage to Asia, however, present two different perspectives. While Asian premiums have rebounded—by more than $5/mt for the first time in the past month—due to the threat of reduced supply from the Middle East, the E/W spread has traded lower, moving away from the yearly highs reached just after the confirmation of last Tuesday’s attack.

So the pricing mechanism to secure barrels from the West has been fully priced into the physical market, but if the market tightens, the outlook suggests higher E/W values could be reached in the short term, going back to this year highs.

E/W regresses after reaching year highs after the Iran attack. (Sparta Live Curves – Seasonals)

The E/W correction has also led to more cargoes staying in the EU, when the expectation was for better economics from the East.

This has widened the European balance over the last few days, reflected in lower physical premiums in both the Mediterranean and Northwest Europe, where OSN cargoes reached negative levels in the window during last week.

Our outlook suggests that the situation will not persist in the long term, as the rise in physical premiums in Asia could continue in the short term, alleviating the risk of oversupply in Europe.

European premiums trading at negative values. (Sparta Live Curves)

On the blending side, the situation points to a tighter market than in the petrochemical sector.

High premiums remain compared to historical values for light qualities such as LVN and C5+, but the physical premiums for heavy naphtha are trading lower, up to $30/mt below the levels seen a month ago, with hardly any premium over the window OSN qualities.

Although most of this correction is due to the change in blending specifications favouring components with a higher RVP than heavy naphtha, it still marginally enters the blend, and everything points to it continuing to do so throughout much of Q4.

The current situation of European blending in the short term is bullish. The region sits as the most economical option to supply a large number of markets both in the West and East, which should boost European blending and the EBOB complex in the short term.

European blending naphtha demand could increase in the near future. This may push regional prices higher, driving EBOB to continue its upward trend and stimulating Gas-nap to break the $50/mt resistance.

European premiums trading at negative values. (Sparta Live Curves)

Driven by the aforementioned drop in premiums in Europe and the prolonged decline of TC2, arbitrage towards the US has improved significantly, pointing to an increase in volume that could head to the US in the coming weeks, tightening the European market and providing support to the current correction.

Heavy naphtha from EU finds an arb opportunity into the US on lower physical premium in EU and robust prices in NYH. (Sparta Global ARBs – Dashboard)

Jorge Molinero is a Commodity Owner at Sparta. Starting his career as a financial analyst with BBVA, Jorge quickly transitioned to market intelligence within the energy sector, spending 4 years as a naphtha analyst with Repsol before joining Sparta in early 2023.

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