The European Naphtha Ravine
The month of April for the naphtha market has been nothing but tumultuous. A single glance at the price action of the naphtha crack reveals a ravine-like structure, from its catastrophic drop at the beginning of the month to its gradual upwards ascent. Though labelled as a waste product in the oil refining process, it has immense applications as a raw material in the petrochemical industry, and as a blending component in gasoline.
The Drop
Naphtha bears came out guns blazing following the easter break. There was increased physical supply into Northwest Europe (NWE) from the Middle East and the US Gulf Coast, which coincided with the return of refineries out of maintenance, as they looked to utilise strong margins at the time. This weakness was reinforced by stronger crude prices, especially with Dated Brent rallying. With gasoline production beingas incentivised by refiners, this would lend to a naphtha supply glut as a byproduct.
The fundamental weakness was certainly justified. However, the $4 gap down in a single day was rather incredulous, triggering stop-outs en masse. We saw both physical and financial players get progressively shorter over this period, including trade houses, majors, and funds. Levels in the European crack found lows at -$13/bbl before its subsequent upwards rebound, which has continued into the first week of May.
A Complete 180
Negative simple refinery margins saw naphtha better bid. Moreover, Adnoc’s crude flexibility project for its Ruwais refinery means that heavier crude grades are being imported, such as Iraq’s Basrah Heavy, whereas the lighter, and more napthenic crudes like Murban are being exported. In addition, there is fewer exports out of the Persian Gulf, whilst Europe is withholding some naphtha for cracking and blending demand on the back of a tight components market. All of this points to increasing tightness in the naphtha market.
Now, naphtha cracks and spreads have been on an unstoppable upwards trend in the first week of May, which has all the hallmarks of a bull play. NWE has been pricing at +$30/mt in the window and Asia (MOPJ) at +$17/mt, with a major on the buyside of the former suggesting a potential shortage of a cracker-grade in Europe. Continued Ukrainian drone attacks on Russia’s oil infrastructure is also a bearish factor.
Soon vs Future
Yet, not all is looking rosy for naphtha, and in fact, it is a bit wobbly. In the futures market, one is always comparing the soon versus the future. The May/Jun crack roll did blow out, but this could indicate bearish indicate in the future months, with current strength focused in the prompt. However, the June crack is seeing some resistance at -$10/bbl levels, where traders are unloading cargoes from the US into Europe.
Backend timespreads have corrected lower, and Cal25 FEI/MOPJ buying could apply serious pressure to naphtha cracks. As US gasoline weakens, this has hammered the gasnaph (gasoline vs naphtha), so players buying the dip would synthetically weaken naphtha.
So where does this leave us? The European naphtha market is arguably in a tight spot right now, with strong European pricing sustaining so far, and many traders are intent on building length. However, the stagnation of the June crack poses a bearish signal, and the question is if current strength will translate into the coming weeks.
Naphtha is no stranger to bull and bear market cycles. There is good bullish momentum right now, but sooner or later, the music will stop.
