Naphtha East-West spread hits over 5-year high on Asia strength, Europe weakness

The East-West spread for naphtha reached its highest level in five-and-a-half years Nov. 24 driven by strength in the Asian market and relatively weak fundamentals in the domestic European market, which incentivized the arbitrage of naphtha eastward.

Platts, part of S&P Global Energy, assessed the front-month East-West naphtha spread -- spread between CFR MOPJ and CIF NWE naphtha cargo swaps -- at $43/mt Asian close on Nov. 24, the highest level since April 30, 2020, when it was assessed at $50/mt.

Market participants cited supply-side tightness in Asia due to Middle Eastern refinery maintenance, limited outlets for Russian naphtha cargoes, strong Asian gasoline blending demand, high freight rates, and weak European domestic demand as key factors explaining the significant strength in the East-West spread for naphtha.

Asian market strengthens on supply tightness

The Asian naphtha market remained pressured by supply constraints amid turnarounds in the Middle East. Kuwait's Al-Zour refinery is not fully operational following an October fire, with expectations to resume by late November or early December. Saudi Arabia's SASREF refinery is undergoing maintenance starting Nov. 15, expected to last a month. Maintenance at SATORP is progressing as planned. Saudi Aramco's Ras Tanura refinery plans maintenance in early 2026, likely in January for about two months.

Following the US sanctions, more naphtha buyers are shying away from Russian naphtha cargoes, leading to increased demand for alternative supplies and further exacerbating the tight Asian market.

According to S&P Global Energy Commodities at Sea data, November loading Russian naphtha volumes plummeted to countries such as India, Taiwan and China. India received 60,000 mt, while China was at 54,000 mt and Taiwan at 37,000 mt. In comparison, the top destinations for October loading Russian naphtha include China, Taiwan and India, at 201,900 mt, 181,600 mt and 140,100 mt, respectively.

Industry sources indicated that Indian buyers are likely to stop importing Russian naphtha. Additionally, Taiwan's Formosa Petrochemical has also agreed to cease purchasing Russian naphtha after scrutiny over its imports, according to a company source.

There are also increasingly fewer buyers of Russian naphtha in China, a Singapore-based trader said.

Meanwhile, naphtha pull into the gasoline blending pool remained strong, supporting the market, sources shared, adding that bullishness in the gasoline complex is likely to continue until the end of the year. Expectations of lower exports from China continue to support the complex.

Freight rates surge

Another factor driving the spreads higher is the stronger freight rates. "With firmer freight rates, the East needs to be high to keep pulling supply from the West", several Asia-based sources said.

LR1s are getting a spillover support from the LR2s due to tight supply and hit a 14-week high Nov. 24, according to Platts data. Close to 200 LR2s are at present trading in the dirty market in their quest for higher earnings, according to several brokers. At the beginning of the month, the LR2 earnings on the Persian Gulf-North Asia routes were less than half those of the Aframaxes, which transport crude and fuel oil on similar routes, prompting fresh interest among clean tankers to switch to dirty.

LR2s are now earning around $38,000/day on a round voyage on the Persian Gulf-Japan route, while the corresponding returns for Aframaxes on the Persian Gulf-North Asia routes are more than $50,000/day, brokers said while factoring in the bunker costs at $450/ton in Singapore, several brokers said.

The LR2s typically enjoy a discount in Worldscale points to the LR1s on the benchmark Persian Gulf-North Asia routes due to the economies of scale. It is currently at w5 according Platts, part of S&P Global Energy, data compared with the usual w15-w20.

Both the vessel sizes are chasing each other higher, and there are close to half a dozen naphtha cargoes seeking tonnage in the spot market for loading during the first half of next month, including at least four for LR1s, according to brokers, owners, and charterers.

Weak European market fundamentals

The European naphtha market experienced some domestic weakness, which also contributed to the widening of the European naphtha discount to Asian levels.

Commenting on the current weakness in the European naphtha market fundamentals, a Europe based trader source said, "on petrochemical demand, Europe is just dead with crackers shutting down, I do not expect demand to recover significantly and steadily anytime soon", and on the gasoline blending demand, arbitrage gasoline flows from Europe to WAF and the US should "support naphtha in short-term" but, "as transatlantic arbitrage [for gasoline] is finishing, pressure might indeed ease [on naphtha to go into blending]".

Two other sources agreed that demand in the European naphtha market remains "low," which explains the widening of its spread to Asia.

According to CAS data, 1.77 million mt of naphtha went from Europe and the Mediterranean (including North Africa) to the Far East and Southeast Asia over the last two months, with the majority of the product coming from Algeria at 1.1 million mt.

However, one of the European market sources also voiced concern that this strength in the East-West spreads may not be fully supported by current fundamentals. "[It is] still a mystery to me why it got up so high on EW on the front," and, even though there is evidence in market fundamentals in both Asia and Europe along with freight to support this, "above $39-$40/mt [for EW] is a stretch", the source said.

It remains uncertain whether the currently high levels of the East-West spread will be sustained by the fundamentals in the long run.