Differentials exist in all markets, not limited to when you choose to pick a different captain to Haaland in fantasy premier league. In the oil market, an important differential is gasnaph, which utilises one of naphtha’s key roles of being a blending agent.
Gasnaph, with the clue being in the name, represents the difference in price between comparative gasoline and naphtha contracts. For Europe, this is portrayed through EBOB Gasoline – NWE Naphtha (gasnaph – $/mt) and for Asia it is Sing 92 Gasoline – MOPJ Naphtha (92/MOPJ – $/bbl).
This is an important differential contract as the straight-run gasoline produced from refineries needs to be blended with heavy naphthas (e.g. alkylate, reformate, benzene, toluene, xylene) in order to be converted into high octane finished motor gasoline. Thus, when the gasnaph is widening, i.e. gasoline is getting more expensive relative to naphtha, then players will prioritise blending in an attempt to maximise profits, and visa-versa.
Looking at the current gasnaph climate, it has witnessed a strong rally since the early stages of 2024. Q2’24 gasnaph prices have rallied from $150/mt handles at the start of the year to highs of almost $220/mt on Feb 14, before retracing slightly to $200/mt come Feb 21. This support has emanated from continuous Ukrainian drone attacks on Russian oil infrastructure, such as the Tuapse, Ilsky and Afipsky refineries. In turn, this has damaged distillation units in Russia, harming the ability of refineries to upgrade heavy residual to create high octane blending components, leading to a very tight supply of said components, widening the gasnaph.
The recent retracement which gasnaph structure has witnessed has been predominantly a function of a correction downwards due to the oversaturation of long positioning in European gasoline. Both EBOB cracks and spreads have come off in the week with Q2’24 EBOB crack falling over $3/bbl to close at $19.15/bbl on Feb 20.
Furthermore, on Feb 21 the octane arb from East to West opened, allowing European blenders to receive some of the recently sparse octane blending components needed for finished gasoline. This lent naphtha some bullish support, thus softening the gasnaph price. Although, players have been happy to buy back gasnaphs at sub-$200/mt levels for the Q2’24 tenor. This, alongside the scale of the move, suggests that these blending components are still very limited and the octane arb may only remain open temporarily.
Looking forward, it will be important to monitor gasoline participant sentiment and whether players remain keen to own summer structure. Moreover, the Dangote refinery in Nigeria is also of great interest. Currently, the refinery is only running crude through a CDU and producing straight run raw products, issuing tenders for 65,000mt of LSFO and 60,000mt of naphtha over the past week.
However, there is the expectation that come late Q2’24 / early Q3’24 the refinery will have received its planned upgrades such as hydrocrackers and fluid catalytic crackers “FCCs”, allowing the refinery to produce finished products.
In addition, with an FCC the Dangote refinery will become able to process its own Nigerian crude, Bonny Light and Agbami grades. Both of these Nigerian crudes are light and naphthenic, thus, produce notable proportions of heavy naphtha. This is important because heavy naphtha is utilised in a catalytic reforming process to produce reformate, a key high-octane gasoline blending component for finished gasoline. Therefore, Nigeria could be able to produce finished gasoline in their own backyard, painting quite a weary picture for Q3’24 gasnaphs which could get toasted, alongside an already waning sentiment and players seemingly bidding on the basis that Q2’24 was still bid.
