Naphtha market in uncharted territory

Commentary summary:

• Physical premiums in Asia have surged, with the first post-war spot tender clearing above $100/mt to MOPJ for April 2H delivery.

• The arb from the Atlantic Basin is beginning to stir but faces a structural ceiling, Europe and the US can’t offset the lack of ME supply.

• The petrochemical complex across Asia remains largely inoperative, with Force Majeure declarations spanning the main Asian petrochemical hubs.

• India’s LPG supply chain is under severe strain, with restaurant closures and panic buying reported across major cities.

The prompt naphtha E/W spread has broken above $130/mt for March contract, a level that would have been dismissed as unthinkable previously. The move reflects a market no longer pricing a temporary supply disruption, but a structural feedstock deficit with no credible near-term resolution.

(E/W keeps breaking historical levels on Middle East conflict)

The driver is by now familiar, with the Strait of Hormuz effectively closed since the US-Israeli strikes on Iran on 28 February, approximately 70% of Asian naphtha supply has been severed from the market.

The scale of the dislocation is visible across the entire curve. April/May MOPJ timespreads have exceeded $60/mt since the start of the conflict, surpassing the extremes recorded during the 2022 Ukraine war.

(Timespreads severely impacted globally, with Asian ones climbing to record levels)

Physical premiums in Asia have followed. News about a tender transacted at above $100/mt to MOPJ for April delivery, confirming genuine end-user urgency in a market otherwise paralysed by force majeure declarations.

Naphtha sources in the Arabian Gulf report that FOB India levels are approaching, if not already in, triple-digit territory. China’s tenders for several destinations went unanswered earlier this week, underscoring that even at these extraordinary premiums, physical availability is the binding constraint, not price.

The arbitrage picture is beginning to stir, the pull-on western volumes is building. The obstacle has been freight, with LR voyage costs from the Mediterranean to the Far East running near $8 million on a round-trip Cape basis, but E/W and physical premiums in Asia are currently offsetting the cost increase.

The structural limitation, however, persists: Europe and the US together account for roughly 15% of Asia’s naphtha imports at most. Even full Atlantic Basin participation cannot close the gap. Demand destruction, not supply rebalancing, will continue to clear the market for as long as the blockade holds.

(Arbitrage from the west show a wide-open margin, but it will be unable to offset the lack of ME supply)

The India LPG story adds a further dimension to the regional picture. With approximately 90% of India’s LPG imports transiting Hormuz, the supply squeeze has moved well beyond trading floors into the physical economy.

The government has since directed refineries to prioritise household cooking gas supply over commercial customers. Restaurant associations across the country are reporting closures, with panic buying leading to queues at gas agencies in multiple cities.

(Propane FEI finds new highs while India struggle to cover its demand for cooking power)

The petrochemical complex meanwhile remains largely inoperative across the region with force majeure declarations now span Korea, Japan, Singapore, Indonesia, Taiwan, Thailand and Vietnam.

Until there is credible and sustained visibility on Hormuz reopening and tanker transits normalising, this market remains structurally dislocated and trying to pull barrel from West to East.