Naphtha market stays tight as supply alternatives narrow

Commentary summary:

• The physical market does not care about peace headlines, with Asian premiums above $150/mt and NWE premiums surpassing $30/mt.

• Even with a truce, Asian balances would remain tight, with West to East imports still needed to replace missing barrels.

• Damage to Middle East infrastructure is increasing the risk that current tightness becomes structural rather than temporary.

• Fresh Ukrainian attacks on Russian infrastructure have added further support, especially with Ust Luga reportedly still offline.

Naphtha market has moved back to new highs last seen at the start of the conflict, despite early week headlines around a potential de-escalation that pushed E/W lower, the market now continues to price the current physical imbalance created by the ongoing loss of AG supply.

Fresh Ukrainian attacks on Russian infrastructure have also contributed. Rumours that Ust Luga remains offline are especially significant, given that it is Russia’s main naphtha export outlet and one of the key fallback supply sources that could help offset the missing volumes from the Middle East.

(E/W and MOPJ spreads are back to historical highs)

Even if a truce, or even a peace agreement, were to be confirmed in the short term and allow activity through the Strait to resume, naphtha supply into Asian markets would likely remain disrupted. Imports from the West would still be the main support mechanism to replace the lost barrels.

This dynamic is increasingly at risk of becoming structural over the medium to longer term given the damage to Middle Eastern infrastructure. This week, reports emerged of a strike on Qatar’s Pearl GTL facility, which could reportedly take more than a year to repair.

The spike in naphtha has already sharply eroded aromatics margins, raising concerns about potential regional shutdowns as operations become economically unsustainable.

The physical market barely reacts now to the de-escalation headlines. Prices continue to rise across regions, with Korea premiums now above $150/mt, while NWE premiums have gained more than $15/mt to settle above $30/mt, as the West is forced to compete with strong eastbound arbitrage demand.

Tightness in the physical market is also feeding into new restrictions. The latest example is South Korea’s new export control on naphtha products, which comes into effect at midnight this Friday, as disruptions continue to hit feedstock flows into the country’s petrochemical sector, around half of which relies on imports via the Strait of Hormuz.

Freight is reinforcing the same story, with West to East fixtures continuing to rise daily. An LR2 fixture for a naphtha cargo from the USG to Japan was last reported at $9.6 million, double the freight level seen before the conflict began.

(Physical market keeps tightening along all the different geographies)

Paper volatility will remain highly headline driven in the near term, especially over the weekend, as the market swings between pricing a temporary truce and the risk of a further escalation, potentially involving the seizure of Kharg Island.

But as this week has shown, while paper may continue to swing sharply on headlines, physical prices and freight still point to further upside as long as barrels do not flow through Hormuz and alternative supply routes, including Russia, remain constrained.