The heat is on: Slackening Asian naphtha demand constricts E/W spread as petchems consumption slows; and Med, ARA output thins

Growing pessimism about Asian demand and worsening Med supply availability due to heat-related operational issues has continued to keep the bulk of Eastbound arbs shut through early Q4. Narrowing opportunities to ship barrels to northeast Asia is best exemplified by the August East/West spread, which is at a year-to-date.

The September E/W spread is heading in the same direction and further contraction is likely, given the recent collapse in Asian forward steam cracker margins and the dip of first-half September premia into negative territory.

Time spreads staged a sharp mid-week rally, as weaker flat prices enticed some buyers. Backwardation in ARA naphtha is also slackening, but the downtrend is far milder as curtailed Med and ARA refinery output offer a decent amount of price support.

Time spreads staged a sharp mid-week rally, particularly in Europe as curtailed Med and ARA refinery output offer a decent amount of price support. (Sparta Live Curves)

That said, global naphtha cracks remain strong, but this dynamic is best viewed in the context of the more dismal fundamentals facing gasoline and diesel markets.

Heavy naphtha Asian sales prices still well-supported given relative better performance of material slated for gasoline blending, as opposed to waning petrochemical consumption that would push back on light/OSN material. (Sparta Live Curves)

Returning to Asian markets, a spate of unplanned cracker shutdowns in northeast Asia in the last two weeks, coupled with extended turnarounds (Cilegon, Idemitsu Kosan and Mitsui, among others) does not bode well for Asian markets as September business kicks into high gear. Although naphtha has been clearly signalled as more favourable feedstock in the region, forward steam cracker margins have fallen about $100/t w/w as flat prices rebound from recent lows.

However, heavy sales prices in Asia are still relatively well supported, a testament to rebounding regional gasoline demand, while premia for OSN and light barrels are reflecting petrochemical players’ growing pessimism.

Time spreads staged a sharp mid-week rally, particularly in Europe as curtailed Med and ARA refinery output offer a decent amount of price support. (Sparta Live Curves)

Med FOB premia remain stubbornly robust. With no end to the current heat in sight, it is highly likely these elevated levels will remain in place through the end of the month, ensuring regional supplies stay local and keeping Eastbound arbs shut. Piling on to the upward pressure, we understand the Star refinery has further curtailed its naphtha output due to unspecified operating issues.

Despite stronger NWE sales prices, the Med-NWE arb remains largely shut. Spiking freight has recently ensured arbs have fallen deeper into the red, but these should come off, allowing for some incremental barrels to flow into the region. (Sparta Global ARBS-ARBs Dashboard)

As a result, sales premia in Northwest Europe—where regional refineries have been also plagued by heat-related malfunctions and lower output—have had to perform to lure Med barrels West, but rising freight has crippled these efforts at least in the near term.

Finally, the Rotterdam-New York Harbor arb remains closed, as we expected, as gasoline arbs on the same route are similarly unprofitable. Colonial Pipeline nominations also look quite dire, it is unlikely this route will return to profitability in the near term.

That said, while market bears are loudly trumpeting the end of the summer driving demand, we would still caution that hurricane season is entering its peak period, meaning both gasoline and naphtha still have the ability to surprise to the upside over the next weeks.

The Rotterdam-New York Harbor arb has shut down through end-Q4. While market bears are calling for the end of summer driving demand, we would caution the impending peak of USGC hurricane season could still hold some upside price surprises for both gasoline and naphtha markets in the coming weeks. (Sparta Global ARBS-ARBs Dashboard)