This ceasefire does not move barrels

Commentary summary

• The naphtha market trades higher for a second session post US-Iran ceasefire, with the initial paper correction already reversing as fundamentals reassert themselves.

• The E/W fell $40/mt on the prompt during Wednesday’s session but has since recovered $20/mt, reflecting the market’s recognition that the ceasefire has had noimpact on actual export volumes.

• Attacks on Saudi Arabia’s East-West pipeline, and key Saudi Arabia facilities further constrain Middle Eastern export capacity.

• West-to-East naphtha arbitrage flows will remain necessary not just through May and June but for months after any potential normalization of Hormuz transit.

The naphtha market continues to trade higher in its second session following the ceasefire announcement between the US and Iran.

As we have been commenting at Sparta since the announcement, despite the political rapprochement, the impact on exported volumes has so far been nil, meaning a stabilization of the market remains a distant prospect.

Despite the sharp initial correction in paper, led by an E/W that fell $40/mt on the prompt during Wednesday’s session, the recovery is already palpable, with a $20/mt rebound since then to current levels.

We see the same dynamic in timespreads, while European and Asian naphtha cracks are already trading above pre-ceasefire announcement levels, both at all-time highs.

(Naphtha markets are already recovering after the initial correction. Naphtha cracks trade above the previous levels)

The inability of Middle Eastern exports to cover crude and products demand in Asia remains the core problem, and not only has it not improved, but the announcement of the attack on Saudi Arabia’s East-West pipeline during yesterday’s session further constrains the region’s export capacity.

It has been Saudi Arabia’s only crude export route, representing around 700,000 bpd. The attacks also hit major refining facilities, including SATORP in Jubail, the Ras Tanura refinery, the SAMREF refinery in Yanbu, and the Riyadh refinery, directly affecting exports of refined products to global markets.

Despite the paper volatility driven by headlines, our view remains bullish in the short term. The sharp E/W correction closed part of the naphtha arbitrages from Europe and the US to Asian destinations for deliveries during the second half of May.

The reality is that we are still very far from a potential recovery of exports through Hormuz that would allow Asian players to return to the starting position.

The high West-to-East naphtha export volumes we are seeing will continue to be necessary, not only during May and June but for months after a potential return to normality.

The market is already repricing this fact following a temporary imbalance caused by the sharp paper correction.

We have seen a similar effect on naphtha spreads versus gasoline and the pro-nap.

Since the start of the war, despite the volatility and initial uncertainty, it has become clear that the impact of the current situation is bearish for both gas-nap and pro-nap, with naphtha exports being more affected than gasoline exports given that global exports depend to a greater extent on Middle Eastern product.

Against propane, despite the initial panic, the fact that Iran is allowing LPG exports to India also mitigates its effect. Given this dynamic, the initial reaction in both spreads was a sharp correction higher, mainly for the April contracts.

If nothing changes logistically, we will also see a gradual decline in gas-nap and pro-nap back to pre-ceasefire levels.

(Pro-nap and gas-nap point to the downside after the initial recovery)

In summary, the market is sending a clear message: this ceasefire does not move barrels.

Until we see a tangible and sustained recovery in Middle Eastern export flows through Hormuz, the physical tightness that has defined this market since the onset of hostilities remains the binding constraint.

The ceasefire may have triggered a short-lived paper repricing, but the structural deficit in Asian supply is unchanged, and the latest attacks on Saudi infrastructure only deepen it.

We expect naphtha prices to continue grinding higher as the market reasserts fundamentals over geopolitics.