Twist of freight: Plummeting ship rates insufficient to reopen near-term naphtha arbs; FOB values to remain strong as refinery works loom

Global naphtha cracks remain strong with Q4 coming in only a touch stronger than historical averages, signalling limited downside. Additional unexpected supply curtailments could provide further support for naphtha cracks in the near term.  

Global naphtha cracks are unseasonably strong for October and Q4 but are likely to remain so given ongoing supply curtailments that are likely to get exacerbated as refinery maintenance piles on in September and October. (Sparta Seasonals) 

The front of the curve has flipped into contango as some of the anxieties around supply tightness calms. We also understand that some of last week’s run-up at the prompt was due to some short-covering ahead of the holidays in Singapore, just prior to the roll.

That said, we continue to note the increasing bearishness creeping back into the Asian market, as concerns around Chinese demand through year’s end resurface.  

The East/West spread has corrected sharply, as we called for in last week’s commentary, but prompt and Q4 E/W spreads remain stronger than seasonal averages, where they could remain into early Q4.

This, largely due to further tightening in refinery output in the coming weeks due to higher y/y maintenance in September for the Arab Gulf, Med and Northwest Europe in September, and in October for northeast Asia. We also note steam cracker maintenance in the Far East is projected to be lighter y/y through year’s end, meaning stronger feedstock demand.   

Despite recent corrections, the E/W spread is likely to remain stronger than seasonal averages through early Q4 on expectations of continued supply curtailments. (Sparta Live Curves)

Eastern pro-naps have come off to about $10/t wider than seasonal averages at the prompt and Q4 as AFEI propane retraces from the recent strength that propelled naphtha to becoming the more cost-advantaged steam cracker feedstock unseasonably early.

Still, both pro-naps and our forward regional steam cracker margins continue to point to naphtha as being more profitable to burn through late Q1, cementing our base case assumptions. 

Overall, little has changed from last week’s view in that arbs should largely remain shut across the board through October deliveries. Sales prices for heavier material remains strong, although notably open spec sales values are staging a comeback after prompt material hit a year-to-date low earlier in the month, implying a relatively healthier appetite from gasoline blenders. 

(Sparta Global ARBS – Pricing Centre)

Global arbs to both East and West remain largely shut except for a handful of routes. Heavy naphtha barrels are still proving more profitable to export than lighter material, implying a relatively healthier appetite from blenders. (Sparta Global ARBS – Pricing Centre) 

We noted last week that freight could be the main lever in reopening near term arbs. Freight has indeed moved lower—with the notable exception of TC15—but it has been insufficient to overcome still strong AG and Med FOB values.

Asia sales prices could play a part as well, especially having bounced back into positive territory recently, but given the increasing bearishness we are sensing from Asian market players in the near term, we think potential upside might be similarly insufficient. 

(Sparta Live Curves)

Despite most clean freight routes continuing to see rates plummet, most arbs remain stubbornly shut despite some recent mild price corrections to still strong FOB premia. (Sparta Live Curves)

Sparta’s freight team notes that while clean day rates are approaching operating costs, they are still marginally viable and, more importantly, offer better opportunities than dirty routes. More dirty vessels moving into the clean pool would ultimately increase vessel supply length, meaning the risk is to the downside for clean freight in the near term.  

But as we have noted in the past—particularly for the “blink and you’ll miss it” volatile Rotterdam-NYH route—an opened arb hasn’t engendered a meaningful chipping away at supply length, either, implying that there is a lack of substantial incremental demand.  

Effectively, while we expect freight to do the heavy lifting to reopen arbs as freight for certain routes head towards breakevens, it is challenging to see how both demand and supply prices will cooperate to keep those arbs open sustainably through October deliveries.  

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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