Peace headlines hit paper, but naphtha physicals remain in crisis mode

Commentary summary:

• The latest paper sell-off is driven by diplomatic headlines rather than any meaningful improvement in physical supply. Paper prices have corrected but naphtha physicals continue to reflect an unresolved structural shortage.

• Physical premiums in Asia continue to climb, with Korea above $150/mt over MOPJ and India above $200/mt FOB MOPAG.

• Product availability remains the key constraint, with no credible near-term rebalancing mechanism in sight. South Korea’s export ban and the risk of further domestic protection measures are adding to the tightening supply picture.

• Russian arbitrage flows remain too limited to offset the loss of regional availability, even under the current waivers.

The latest sell-off in paper appears to be another example of diplomatic headlines moving flat price without changing the underlying supply picture.

After Trump showed new signs of de-escalation on Tuesday, the five-point peace plan jointly proposed by China and Pakistan on March 31, calling for an immediate ceasefire and safe passage through Hormuz, has pushed Brent below $100/bbl and weighed on naphtha paper.

This pattern has already repeated several times since the conflict began, with de-escalation rhetoric softening paper while leaving physical conditions largely untouched.

(MOPJ prompt crack leads paper correction on the new peace headlines)

Among the energy complex, naphtha remains one of the commodities most directly exposed to the disruption, and price action continues to move into unprecedented territory.

The E/W April contract climbed above $100/mt earlier in the week, MOPJ timespreads remain above $120/mt despite a $10/mt correction over the last two sessions, and physical premiums keep setting new highs.

In the physical market, Korea is now assessed above $150/mt over MOPJ, while India is holding above $200/mt FOB MOPAG, confirming that product availability remains the binding constraint.

Even as paper reacts to shifting headlines, the physical complex continues to reflect a market with no credible near-term rebalancing mechanism.

(The physical market remains tight despite the ongoing de-escalation talks, trading at historical high levels)

Further export restrictions are beginning to tighten the picture even more. South Korea’s five-month naphtha export ban comes fully into force this week, and further policy measures aimed at protecting domestic markets look increasingly likely while supply remains under pressure and access to replacement barrels stays limited.

South Korea has bought Russian naphtha for the first time in four years under the new waiver that expires on April 11. But Russian arb arrivals for May have already fallen below 0.25 Mt/month after the March 25 drone attacks on Ust Luga, so even if we see more waivers coming and more arbitrage flowing from the West, the imbalance will remain as long as Hormuz stays blocked.

On the US, the new EPA emergency waiver has raised the summer volatility ceiling from 51 kPa to 69 kPa. The waiver unlocks more light naphtha as eligible blendstock during the next 20 days, reducing reformer dependency and increasing domestic light-end absorption.

The net effect is bullish for US light naphtha demand, tightening Atlantic Basin balance with an already wide-open arbitrage into the Asian markets.

Looking at alternative petrochemical feedstocks, there is potential for a rebound in pro-nap following the announcement of force majeure after an LEP unit failure at Targa’s Galena Park, which typically sends around 50% of its LPG exports to Asia.

So far, naphtha has remained more exposed to the ongoing war, with East pro-nap currently trading at -$128.50/mt but $30/mt up already in the ongoing session.

(Pro-nap reaches new historical lows, but lower US exports could add support in the short term)

Even in the event of a ceasefire confirmed soon, the physical recovery timeline still stretches well beyond the diplomatic one. Volumes would take months to return to previous levels after a reopening of Hormuz, and the market would need time to stabilize.

Damage to Middle East infrastructure such as Pearl GTL, South Pars, and Ras Laffan only extends that timeline further. In that sense, volatility should now be seen as a new regime rather than an anomaly.

Paper may continue to sell off on peace headlines, but unless physical flows recover, the base price in naphtha is likely to remain structurally elevated.