E/W spread at lowest level since the start of the Iran war despite unchanged Hormuz reality

Commentary summary:

• Naphtha physical market corrects, on a potential resolution that diplomacy has not delivered.

• Demand destruction explains part of the move: NE Asia cracker utilization down to 60% from 80% in February. Chinese naphtha imports down 50% in March.

• But supply is tightening further. Russian volumes set to fall after Ukraine’s new strike on Tuapse in under a week, and USGC stocks are drawing quickly as the US carries marginal supply.

• Base case is a rebound from here, with timespreads already firming. Asia’s shortage is structural, and the setup argues for upside.

The Iran dynamic persists, with every diplomatic step forward immediately met by a new escalation that resets the timeline.

Trump extending the ceasefire was meant to create space for a second round of Pakistan-mediated talks, but Iran’s response within hours was to seize vessels in the Strait, demonstrating that Hormuz leverage remains Tehran’s primary negotiating tool and will not be surrendered until the terms of any deal are finalized and verified. Single-digit daily transits remain against a pre-war norm of above 100 — the physical reality of the Strait has not changed.

Nevertheless, the naphtha E/W spread has dropped to its lowest level since the beginning of the Iran war. The May contract is currently trading below $45/mt, less than $10/mt above the pre-war level — a premium that does not look high enough to match the current scenario. 1H June deliveries from Europe via Cape are now closed, with Asian players holding back purchasing decisions amid the ongoing uncertainty around the Strait of Hormuz. USGC options remain open following the recent TC14 correction.

(May E/W corrects close to pre-war levels)

(USGC margins remain open to the East after TC14 correction, while MED options keep better into NWE)

The physical market, in line with crude, has also been caught in a bearish dynamic over the recent sessions.

The gap between paper and physical has narrowed in the opposite direction to what most of the market expected, with cash diffs correcting lower instead of paper staging a strong recovery for now.

Indian FOB prices have corrected more than $50/mt versus MOPAG over the last week, in line with the correction seen in Japan and Korea premiums versus MOPJ.

Demand destruction is part of the explanation: NE Asia cracker utilization has dropped to 60%, down from 80% in February, reflecting both the feedstock shortage and the economic unviability of running crackers at current spreads. Despite this drop, current price levels do not look justified if the Hormuz disruption is sustained over time.

On top of that, news from China points to a 50% decrease in naphtha imports during March, below 0.9Mt monthly, with these levels expected to keep dropping.

The supply balance is tightening further. Russian volumes are set to decrease in the short term after Ukraine struck the Rosneft-operated Tuapse refinery on the Black Sea for the second time in less than a week.

On top of that, USGC stocks are drawing quickly in the current environment, where the US has been the main marginal barrel covering the supply gap, casting doubts over its ability to sustain the current pace of exports.

(May/June timespreads are the only indicator pricing the current escalation, with E/W and physical premiums falling over the last sessions)

From here, the path looks skewed to the upside, and the firming we have already seen in timespreads over the last few sessions supports that view.

Asia’s naphtha shortage is no longer a cyclical issue but a structural one, and even a relatively quick diplomatic breakthrough would not change the underlying math, Asian buyers will need to keep pulling Western barrels for months to come.