Commentary summary:
European prompt timespreads entered contango for the first time this year.
Year-end European destocking coincided with limited arbitrage opportunities, collapsing physical premiums and triggering declines in cracks and timespreads
E/W climbs to six months highs, surpassing $25/mt. Improving the economics of the arb to Asia.
Margins for Mediterranean cargoes to both NWE and Asia have equalized, supporting market rebalancing.
The significant year-end correction in the naphtha market continues for another week, with Dec/Jan timespreads in both European and Asian markets having dropped by $7/mt since early November.
The drop has been particularly sharp in the European market, where prompt timespreads are currently trading in contango for the first time this year when looking at the M0 and M1 rolling contracts.
Cracks in both markets have also dropped by over $3/bbl over the past month. It is worth noting that they started November at unusually high levels, with the MOPJ crack even trading in positive territory for several weeks.
Following the recent correction, both indicators have returned to levels close to their historical averages.
The weakness in Europe has fuelled a significant rise in the E/W spread in recent days, pushing year-end and Q1 values to their highest levels since Q1 2024, surpassing $25/mt.
The sharp correction over the past month has been driven by an increase in the availability of Russian product.
Following a period of limited arbitrage flows, primarily to Asia, the market progressively adjusted during Q2 and early Q3 to this new dynamic.
This pushed the E/W spread to six-month highs, reopening the arbitrage from Europe and the US to Asia to ensure that the demand from Asian crackers was adequately covered during the period when Russian production dropped due to maintenance and unplanned refinery shutdowns.
These factors drove the market to the highs reached in late October. Since then, a sharp correction has hit both the Asian and European markets, fueled by announcements of Russian cargoes returning amidst weak Asian demand due to low margins, with January deliveries expected to be lower than those at the end of this year.
Additionally, the year-end European destocking has coincided with the lack of arbitrage opportunities in recent weeks, collapsing physical premiums—first in NWE and then in the Mediterranean—and triggering steep declines in paper markets, affecting both cracks and the timespread curve.
However, while recent weeks have highlighted a very weak market due to the lack of arbitrage options to Asia—where the arbitrage has been closed by more than $20/mt—the outlook for year-end has become more supported.
It is challenging to pinpoint a bottom in such a strong downtrend, but the sharp rise in the E/W spread and the collapse of European premiums have radically changed the arbitrage landscape in recent weeks, opening up opportunities for MED cargoes to consider the East as an alternative in the short term.
Margins to NWE and Asia from MED have equalized, and grades more suitable for the Asian market, such as Skikdas, could embark on arbitrage routes for 2H Jan arrivals, helping to ease the European oversupply expected in December.
These physical movements will support the paper market on spreads and cracks and curb the decline in the European market, as well as establish a ceiling for the current uptrend in both the E/W spread and gas-nap spread after a very strong November.
New Podcast Episode – Crude conundrums and refining resurgence: Insights for Q1 2025. Listen here.
Our Sparta Monthly Trading Update for November is now available here and it features an in-depth look at the naphtha market.
Source: Sparta Commodities
