The last few days have been marked by weakness in the paper naphtha market, where we’ve seen contango emerge in both Asia and Europe. Cracks in both CIF NWE and MOPJ are close to annual lows.
The NWE crack is currently trading at -$15.45/mt for the November contract, with a slight rebound from the minimum of -$16/mt reached at the end of last week.
Meanwhile, the MOPJ crack maintains a $1/mt premium, at -$14.2/mt for the same month.
The spotlight in the paper market right now is on the E/W spread, where the differential has been on the rise since early summer, now standing above $12.5/mt, having reached a peak of +$15.5/mt during Wednesday’s session.
Q2 2023 is now a distant memory when the E/W was trading in negative territory, reaching historic lows due to concerns that sanctions on Russia would impact supply in Northern European crackers.
Market sentiment has shifted since then. The negative E/W values pointed to an oversupply of naphtha in the Asian market due to the change in the routing of Russian exports.
Particular weakness in the European paper market this week may be a signal prompt barrels need to price into Asia fast.
In addition to this change in dynamics, in recent weeks, the fear of supply restrictions from the Middle East due to geopolitical conflicts has further encouraged the Asian market to price higher against Europe.
We must also consider the factor of Chinese demand, breaking record highs in naphtha imports during late summer (JODI) and amid positive macroeconomic data in recent surveys, coinciding more recently with heavy East of Suez refinery turnarounds.
In the physical market, however, the EBOB and MOGAS/NAP rebound has led to a strengthening in premiums in Europe, particularly for blending grades like heavy naphtha and LVN.
Given refineries across regions are just coming out of the turnaround season, we see a limit to the upside for these grades.
Indeed, gasoline blending economics themselves remain subdued in NWE, so despite a strengthening GAS-NAP, the marginal pull on naphtha blending appears limited for now.
We might therefore expect cash diffs to come off in the near term to match what paper is doing.
This increase in octane values and their impact on heavy naphtha prices- has closed the opportunities to send it to NYH that were available last week.
A reduced incentive for blending in NWE and weaker paper markets suggest only a short-term strength for these qualities, and the margin could open up again if the European blending outlook does not improve.
On the other hand, in the Asian side of the heavy naphtha market, we see another ongoing trend with the heavy product arbitrage open from USGC to Asia, both in Korea and Japan.
This is due to a stable FOB price in the Western region and a selling price in Asia reaching over +$50/mt above MOPJ on the East market.
Jorge Molinero is Commodity Owner for Naphtha and LPG at Sparta. Starting his career as a financial analyst with BBVA, Jorge quickly transitioned to market intelligence within the energy sector, spending 4 years as a naphtha analyst with Repsol before joining Sparta in early 2023.
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