A quieter week for naphtha, but the relief is already being tested

Deep Dive Summary:

• Naphtha timespreads and cracks corrected on the week as the Petroline restart took risk premium out of crude, with the MOPJ crack losing ground and the NWE crack weakening further
• The E/W is the exception, firming again as freight and Eastern demand hold the spread wide, with the Europe to NEA gate open and October arb into Asia climbing to a decent level
• Even so, the Houthis struck at Yanbu, the Red Sea terminus of the Petroline and the most important bypass asset in the system, just as the line was being brought back
• LR tonnage in the AG is running well short of demand, pushing freight higher and forcing charterers down the vessel size curve

It has been a calmer week, and it has added some relief to the current naphtha market. The East-West Petroline is back in use after the 11 September strikes, which has taken some of the risk premium out of the flat price, and the first US-Iran talks in months took place at the UN General Assembly.

Nevertheless, Hormuz itself has not changed, Tehran’s security chief made clear within hours of the talks that the Strait stays closed until Iran’s conditions are met. Naphtha followed crude lower, with timespreads and cracks giving back ground on both sides of Suez, but the correction looks temporary as there is still no resolution to the underlying disruption.

(Naphtha timespread correct for the second week in a row)

That relief was already being tested by the end of the week. The Houthis launched ballistic missiles and drones at Yanbu, the Red Sea terminus of the Petroline, days into the line being brought back and with only around half of capacity restored.

Saudi Arabia says it intercepted six missiles aimed at Yanbu and Taif and damage remains unconfirmed, but emergency alerts reached as far as Jeddah and Mecca, and the group struck a fuel depot near Riyadh airport days earlier.

On the arbitrage side, E/W has not followed the correction lower. The spread keeps firming and the Europe to NEA gate stayed open through the week, with Med sellers continuing to look for ways to send cargoes East even as LR2 freight climbed. October arb into Asia has built to a decent level, comfortably above September, and the AG’s own October nominations point to a four-month high as gains from the east side of the peninsula more than offset the collapse in Red Sea loadings.

(Margins for West to East arbs have recovered during the week on E/W rally)

On a cross-product approach, the bigger headline of the week is the US diesel export ban that Trump publicly backed this week.

Essentially all USGC MR demand today is diesel, so a ban switches it off at a stroke, and owners who have been weighing whether to dirty up lose the reason to wait.

Every MR that leaves the clean pool stays out for months, which tightens naphtha freight structurally well beyond the prompt.

This joins an already tight LR market that is impacting naphtha through skyrocketing TC5 and TC15, taking landed values into Asia to three months highs.

(Freight from AG and MED into Far East keep skyrocketing, making landed values into the Asian outlets more expensive)

On the demand side, gasoline remains the clearest support for naphtha. EBOB cracks have strengthened amid tight European gasoline inventories and concern that a potential US diesel export ban could reduce refinery runs.

A wider RBOB–naphtha spread has reopened the heavy naphtha arbitrage into New York, while ARA E5 blending margins remain positive in October. The October gas-nap has clear room to widen further, despite it keeps trading at historical seasonal highs.

(Gas-nap keep reaching historical highs for Q4 contracts)

Overall, the week’s headlines have taken the market lower, but the upside risk remains firmly in place. The E/W arb is still pointing East despite rising freight, LR and MR tonnage is scarce and the last strikes in the Red Sea point to a new wave of geopolitical risk.

Very little has actually been resolved, and it would not take much to reprice the complex higher again.

About the Author
Jorge Molinero | Commodity Owner, Light Ends & Gasoline, Sparta Commodities
Jorge is Sparta’s Commodity Owner for gasoline and light ends. He began his career as a financial analyst at BBVA before spending four years as a naphtha analyst at Repsol. His market analysis is cited by Reuters, Bloomberg, and Financial Times.
Connect: LinkedIn

About Sparta
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