Supply issues, gas-nap, and strong US market drive naphtha into strong backwardation, tightening Q1 outlook 

The significant drop in the naphtha market was not supported by current fundamentals underlying the end of Q1 and Q2 balances, as mentioned in last week’s commentary.

The correction was short-lived, and the market is trading higher again, especially in time spreads. Asian sales prices are rising again this week and the risk of product losses from Tuapse and Ust Luga is compounded by a new attack on Russian facilities in Volgograd. 

On the Eastern side, the balance could be tighter than expected due to the shutdown of Idemitsu’s 160,000 bpd refinery crude distillation unit and other secondary units yesterday.

Cosmo Energy has also shut down the 75,000 bpd CDU at its Chiba refinery. The timeframe for these outages could not be ascertained until the cause is known, but both supply losses will maintain the current strong backwardation in the market. 

During last week’s fall, Asia closed the prompt arbitrage with a severe correction in sales prices and an E/W that lost $10/mt after the January escalation due to conflicts in the Red Sea.

But the economics are ramping up again, as per our expectations, April deliveries could increase on a renewed strength on the physical side and the already recovered E/W. 

Heavy naphtha continues to climb since the beginning of the year, driven by a historically wide gas-nap spread. The dynamic of last year seems to be repeating itself in a few months where a return to normalcy was anticipated.

The origin of such high premiums for grades with higher aromatic content dates back to the substitution of Russian crude in the West with lighter qualities whose production results in a higher percentage of light naphtha.

This dynamic prevailed last year, but in recent months, it had relaxed. However, in the current situation where gas-nap has returned to historic highs, physical premiums of naphthas for blending have been pushed up. 

This phenomenon is mirrored in the American market with an upward RBOB/Nap that has also pushed up US premiums, especially in NYH as a blending hub but also in the Gulf, closing the current arbitrage to Asia despite Sing 92 also strengthening since the end of last year. 

In summary, current market conditions suggest that strength will persist, as indicated last week.

Asian premiums will receive further support after Chinese New Year due to shutdowns in Russia and Japan, Gas-Nap is expected to remain high for the remainder of Q1, and the American market, impacted by lower crude runs, could face greater supply shortages with new waves of cold weather. 

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Jorge Molinero is Commodity Owner for Naphtha and LPG 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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