What the freight: Shipping rate volatility on Beryl fears and pre-holiday fixing shuts several prompt arbs; corrections to occurs by mid-month

4 July 2024 Time to read:  minutes

 

 

Global naphtha markets have been quite volatile in the run-up to the July 4th holidays in the US with freight rate and Med FOB price action proving particularly punchy.

While global flat prices, spreads and cracks have fallen sharply—arguably a correction from the overheated upward momentum of recent weeks—the E/W spread has remained rangebound around $16.50-17.50/t, where it should stay given historical averages.

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Despite sharp corrections in global naphtha time spreads, cracks and flat prices, the E/W spread has been rangebound, having landed between $16.50-17.50/t, well within historical averages. (Sparta Historical Forwards)

The real headliners thus far have been freight and FOBs.

A combination of supply fears as Hurricane Beryl barrels into the Gulf Coast and a flurry of fixtures before US traders left their desks for the July 4th holidays, sent freight rates soaring early in the week, putting several razor thin August arbs out of the money.

While most models put Beryl’s second landfall just south of the Texas border, three pre-eminent spaghetti models still show the storm hitting the Texas Gulf Coast early next week, meaning there is still risk to USGC refinery operations but more critically to USGC exports.

Uncertainty as to the storm’s ultimate path after it exits the Yucatan Peninsula this weekend has meant few players want to leave their desks holding on to short positions. 

Assuming there is little disruption to exports, there should be a swift correction in freight rates similar to the one seen post-US Memorial Day holiday weekend, meaning several prompt arbs should return to profitability by the end of next week.

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Freight rate volatility has largely come at the hands of heated pre-holiday ship fixings and a touch of uncertainty around Hurricane Beryl’s impact on USGC export terminal operations. (Sparta Live Curves)

That said, more critical to arbs over the coming months is the extreme heat affecting refinery operations.

As we called for in last week’s naphtha commentary, Med FOB premia have retreated a touch as more regional refineries exit maintenance, offsetting some output losses due to heat-related operating rate pullbacks.

While this has allowed some Rotterdam-bound cargoes to look marginally workable through September deliveries, there’s still a fair amount of price work that needs to be done before a substantial drop in vessel supply length can be observed.

As noted earlier, we expect freight rates to continue their retreat but demand—primarily from the gasoline sector on both sides of the Atlantic—really needs to more significantly exert itself on these markets.

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Med FOB premia have softened as more refineries exit maintenance, but Rotterdam-bound arbs require a further retreat from freight rates and/or continued strengthening from NWE sales prices. (Sparta Global ARBS – ARBs Dashboard)

In contrast, AG FOBs remain stubbornly strong, which combined with early-week freight spikes to close August deliveries into northeast Asia.

We expect these to retreat by mid-month as well, given the recent spate of tenders for late July loaders of light material out of Kuwait, which should prevent FOB values from further overheating.

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Resilient AG FOB premia have put several slim August and September arbs into northeast Asia into unprofitable territory. We expect improving supply length to make the difference here, particularly for lighter quality barrels. (Sparta Global ARBS – Dashboard)

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Sparta Asian forward steam cracker and PDH margins. Asian propane remains the most favourable feedstock in regional steam crackers as underwater PDH margins see excess material looking to displace Asian naphtha in the petrochemical pool. (Source: EIA)

Asian propane-naphtha swaps for Q3 remain narrow but continue to signal propane as the feedstock of choice for regional steam crackers.

Given underwater Chinese PDH margins in the coming months, this dynamic remains our base case until winter demand for LPG kicks in, allowing naphtha to price more favourably into cracker feedslates, which is affirmed by our all-in forward steam cracker margins above.

Finally, we note that Rotterdam-New York Harbor arbs, while still profitable, are narrowing and expect this to slim down further in the coming weeks.

There has been little pick up in the numbers of vessels plying this route ever since the arb reopened in mid-June, signalling insipid demand for the blendstock.

PADD 1 gasoline inventories are above year-ago levels with a w-o-w build seen in the week leading up to July 4. Given prompt gasoline shipments between the two ports are now in the red for blenders, we struggle to see how that arb remains wide on the naphtha side.

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Rotterdam-NYH heavy arb has narrowed with further downside risk coming from closed gasoline arb, higher y-o-y PADD 1 gasoline stocks. (Sparta Global ARBS – Dashboard)

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 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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