Shut tight: More global naphtha arbs in the red as refinery output dries up ahead of maintenance; spread, crack strength to linger

Tightening supply as more naphtha arbs slam shut through October delivery has sent front-of-the-curve spreads to their steepest backwardated structure in several months even as Asian cash premia soften from weakening fundamentals.

Global naphtha cracks—although coming off early-week highs perhaps as a reflection of receding Asian demand, particularly from the petrochemical sector—are similarly robust.

Despite the recent correction, naphtha cracks hitting seasonal averages in the -$2/t area is not improbable, especially if more supply curtailments arise, which is a major risk given ongoing extreme heat and the USGC hurricane season.

Despite recent corrections, outperforming global naphtha cracks could well hit seasonal averages in the -$2/t area, especially if more supply curtailments arise. (Sparta Historical Forwards)

The E/W spread is at its widest in months, increasing about $7/t w/w alone as supply anxiety piles on at the front, exacerbated most recently by the unplanned partial shutdown of OQ’s Sohar refinery, which could further support already-strong spot AG cash premia.

The market seems more concerned about a lack of naphtha supply than waning petrochemical demand from extended and/or unplanned steam cracker outages in Asia, as well as lower operating rates at these plants.

This anxiety is well-founded: despite slackening regional steam cracker and PDH margins, manufacturing for the end-of-year holidays peaks in September-October, which is the current buying cycle in the region.  

That said, the September and October E/W spreads are a touch above seasonal averages and with refinery and steam cracker maintenance looming in the fall on either size of the Suez Canal, the window for further significant upside to E/W spreads in the near term is fairly small.

Thus, if regional buyers are hard up for near-term barrels, Asian sales permia need to move up at least $7/t from current levels.

Despite wide E/W spreads through October, most arbs remain shut into the Far East during that time frame. (Sparta Global ARBS – ARBs Comparison)

Sparta Asia forward steam cracker and PDH margins. *NB: We now incorporate logistical costs (i.e. utilities, etc.) into our calculations. (Source: EIA)

From a supply standpoint, Med and AG FOB premia are little changed from last week, at or near year-to-date highs. Downside price risk is minimal given seasonal refinery maintenance will soon begin.

Similarly, Asian sales values continue to diverge, with heavier material strengthening as regional gasoline proves resilient against the recent volatility in the larger crude complex, while premia for lighter barrels are coming in at year-to-date lows.

Clean freight could help reopen some WoS marginal arbs as rates—with the notable exception of TC15 (Skikda-Japan)—plummet.

While our freight team notes that rates are now at levels where they should be bottoming out, there doesn’t seem to be enough activity to curtail vessel supply and meaningfully move rates higher in the near term.

Clean freight rates are now at levels where they should be bottoming out. However, there doesn’t seem to be enough activity to curtail vessel supply and meaningfully move rates higher in the near term. (Sparta Live Curves)

Little has changed in NWE markets, where Med resupply looks utterly non-existent ahead of heavier refinery maintenance y-o-y in the NWE and the Med.

Bonny remains the cheapest source of light naphtha into Rotterdam, although notably, USGC heavy barrels on an MR have returned to profitability, likely on the back of EBOB’s recent rally.

Med resupply looks utterly non-existent ahead of heavier refinery maintenance y-o-y in the NWE and the Med. Bonny remains the cheapest source of light naphtha into Rotterdam. (Sparta Global ARBS – ARBs Comparison)

In the US, adequate gasoline stocks in PADD 1 continue to keep inbound cargoes at bay. Our market soundings affirm lacklustre volumes moving on Colonial, while questionable gasoline demand data from EIA should do little to perk up market bulls.

The marginally open arb from the USGC for heavy naphtha into New York Harbor in early Q4 seems incongruent with the onset of PADD 1 refinery works in October so we would expect that arb to fall out of the money in the coming weeks.

 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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