Correction without relief

Deep Dive Summary:

• Drone strikes from Iraq hit at least two pump stations on Saudi Arabia’s East-West Petroline, taking around 5 mb/d offline with no repair timeline confirmed.
• The Red Sea arb into NWE remains open, but with the escalation continuing it is hard to see it posing the bearish risk to Europe it has over recent months.
• MOPJ and NWE timespreads both gave back around a fifth of their value on the week, with the MOPJ crack losing more than half.
• The E/W barely moved at +$60/mt, keeping the arb East open on some Western routings with the Cape workable for November onwards.
• Gasoline keeps the floor under naphtha, with EBOB spreads back above $108/mt and E5 blender margins opening as gas-nap rallies.

New escalation in the AG keeps the spotlight this week, with drone strikes launched from Iraq hitting at least two pump stations on the East-West Petroline, taking around 5 mb/d offline, roughly 4% of global supply, with the Saudi Energy Ministry calling the shutdown a precautionary measure and no repair timeline confirmed.

The April strike on the same line saw flow restored in about three days, but the damage this time is materially heavier.

The consequence is that the one workaround keeping AG barrels out of Hormuz has closed, with Yanbu export stocks put at five to seven days from the strike, so those barrels now have to load inside the Gulf and transit a strait where the risk premium keep climbing.

European refineries have already been told some September-loading Yanbu crude cargoes will be cancelled. On naphtha, the Red Sea arb into NWE remains open at current levels, but with the escalation continuing and the E/W pipeline down, it is hard to see this arb posing the bearish risk to Europe it has over recent months.

Naphtha structure has corrected even so, with the MOPJ and NWE timespreads both giving back around a fifth of their value and the MOPJ crack losing more than half. But the E/W barely moved, holding +$60/mt at the time of writing. At this level the arb East stays open on some Western routings, with the Cape re-routing still workable for November onwards. Nevertheless, weak Asian demand keeps limiting the pull and the bullish impact on the overall naphtha paper market.

(Backwardation weakens across Asian and European markets)

Gasoline remains the most visible support for the market and it keeps giving naphtha a floor. In Europe, EBOB spreads gained back above $108/mt with the crack following, and Rotterdam barges trading at +$150/mt.

E5 blender margins have opened as gas-nap rallies, which increases the incentive to blend naphtha into the pool. In the US, the seasonality turn after 15 September, with lower RVP grades losing their summer blending advantage, has translated into weaker naphtha prices.

Houston light sour, light sweet and heavy naphtha were the only PADD 3 components not finding support this week, which also improves the economics of light naphtha arbs from Houston into Brazil.

(Gas-nap keep reaching historical record highs)

Pro/Nap East keeps narrow on the Aramco news and bringing Asia within sight of parity, which strips out the switching option entirely and leaves crackers already configured on LPG carrying badly compressed margins.

Aramco telling Asian customers it will not supply propane through 1H 2027 on maintenance, butane aside, keeps the forward curve pointing the same way, with Middle East flows to Asia running at barely a quarter of pre-war levels.

Cleanly supportive for Asian naphtha demand looking forward.

(Pro/nap outlook keep strong in Asia, barely touching parity during the week)

Staying with cracker economics, the medium-term fundamental picture looks less optimistic, since the ethane switch is gathering pace across Asia. Wanhua will shut its 1.2 mtpa No. 2 cracker at Yantai in October for over a month to convert fully from naphtha, repeating what it did with No. 1 last year.

At current naphtha levels the economics are hard to argue with, and with MOPJ near double pre-war levels more of these conversions are coming.

Overall, the global light ends complex stays biased to the upside. The correction in naphtha timespreads has not been matched by any easing on the ground, where the pressure on AG flows is if anything greater than a week ago.

Freight is at record levels, gasoline cracks are at decade highs and the propane route out of the feed slate has closed for Asian crackers. That leaves a market with very little cushion, and the risk from here sits firmly on the upside.

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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