Naphtha's post-Hormuz reality: tight supply, wide arbs and a bullish gasoline pull

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Gary Clark:

Hello, and welcome to the Platts Oil Markets podcast by S&P Global Energy, where today we will be talking about the European naphtha markets amid the Strait of Hormuz closure and a strong US driving season, which has seen gasoline blend stocks rise in value, pricing out naphtha for use in the petrochemical industry amid logistical challenges due to low Rhine water levels. I'm Gary Clark and I manage the EMEA Clean Refined Products price reporting team based out of London. I'm joined by Barbara Fernandez-Pita, who focuses on naphtha and LPG markets. Welcome, Barbara.

Barbara Fernandez-Pita:

Thank you, Gary.

Gary Clark:

Naphtha goes into the gasoline blending pool and into the petrochemical industry where it has many uses, such as to make plastics. Europe is a net exporter, mostly from the Mediterranean, with those exports headed to Asia, which is the world's largest petrochemical demand hub. Naphtha, like all oil products, rose to record levels at the start of the Strait of Hormuz supply disruptions. Platts Naphtha CIF Northwest European cargoes, the benchmark in Europe, rose from under $500 per metric ton in January to over a thousand dollars per metric ton in April, and now sits around $760 per metric tons as the crisis continues. So in terms of the Strait of Hormuz supply disruptions, I mean the US war with Iran kicked off at the end of February, and that's when prices really started to rise across refined oil products. What are you seeing in terms of flows with respect to those disruptions now, Barbara?

Barbara Fernandez-Pita:

Yeah, thank you, Gary. And I think that's a great first question to set the scene on really what we've been seeing on the naphtha side since this pivotal closure of Hormuz happened in February. So the Middle East Gulf used to export around 50 million metric tons of naphtha per month, and the UAE was the biggest exporter. Now that number is down dramatically to around four million metric tons per month. This is obviously a massive constriction in supply. The biggest off-takers and thus the biggest impacted have been the Far East and Southeast Asian countries such as Korea and Japan and China. So this has really compromised their ability to get cheaper naphtha and has thus increased the delivered price of this feedstock into Asia.

In practical terms, this has led to really wide East West spreads. This is the difference between the price of delivered naphtha into Northwest Europe and the price of delivered naphtha into the Far East. And this level soared to over $100 per metric ton on March 30th, and it is now at 56. This has really opened the arbitrage from the Mediterranean and Europe, which is traditionally quite a long region to the Far East and to Asia. So that is definitely something that sources have been telling us how there's been an increasing flow of naphtha from Europe and the Mediterranean into these Far East Asia countries.

Gary Clark:

I see, so obviously naphtha's a seaborne global market, and depending on the balance in Asia, obviously that affects European balances. So we're seeing more of a flow now from Europe to those Asian markets.

Barbara Fernandez-Pita:

The economics certainly would accompany such a flow, whether we actually have seen that as a bit of a matter that remains to be seen. Really, we do see that there's been a bit of an uptick in flows, but equally, Europe has also seen a big constriction in its own supply of naphtha. We had a really very extremely bullish summer that I'm sure we'll get into soon, but that's also consumed a lot of the extra length in naphtha that we had in the Atlantic basin.

Gary Clark:

I see. When you look at oil products across the board, there has been a certain level of demand destruction, depending on which particular oil product you focus on. But when we move into the summer, typically gasoline demand because of the US driving season and driving elsewhere really picks up and as it does for jet fuel when people are going on holidays, et cetera. So we're hearing that we've had quite a strong US driving season, is that right? And how is that affecting the naphtha markets?

Barbara Fernandez-Pita:

Indeed. So this summer driving season in the US has been extremely strong. I think our gasoline colleagues tell us that the US Atlantic coast inventories actually fell once again to over 50 million barrels according to the Energy Information Administration. And this really leaves regional inventories quite a bit tighter than the same period last year, really sitting over just under three million barrels below year ago levels. So it's had a bullish summer cocktail release. So blend stocks like MTBE, reformate, and aromatics have also been very expensive in Europe. These are elements that are blended into the gasoline pool. And when their price increases, this also translates into higher gasoline prices. This has really happened on the MTBE side, especially because we have seen lower Chinese export availability.

Gary Clark:

And that's as a result of the supply disruptions and the straight hummers, they're hanging onto their blending component.

Barbara Fernandez-Pita:

Yeah. So what has this meant for the naphtha market? Well, we've seen the gasoline naphtha spread soar to over four year highs during the summer of 2026, far surpassing the $300 mark. And the gasoline naphtha spread is a very important metric that blenders look at because it really tells you how economical it is to blend naphtha into gasoline. So when you see spreads sorted to such levels, really blenders are going to be buying as much naphtha as possible and really maximizing its inclusion in the gasoline blending pool. So gasoline has been the biggest demand driver for naphtha during this summer and it has really underpinned naphtha prices.

Gary Clark:

I see. And another feature of the naphtha market within Europe is a extremely strong backwardation right now. And by backwardation, we mean that the price now for delivery of naphtha now is very high relative to the price now for delivery at some point in the future. And that basically suggests that the market is very tight right now. And during that kind of market structure, it's very unusual for people to want to hold inventory because the expectation is that potentially the price is going to fall going forward.

Barbara Fernandez-Pita:

Indeed. So it's a pretty interesting dynamic that has emerged within the naphtha market during the month of August. So our sources have been telling us that despite there being a really strong backwardation in the naphtha market, as you rightly pointed out, Gary, the wide European gasoline naphtha spread has really encouraged participants to store naphtha despite the backwardation. Usually a backwardated structure, as you said, punishes inventory holders because it just means that you're holding something that in the future is going to be cheaper than it is if you would sell it today. So this really highlights the fact that the gas-nap spread is so strong that it's offsetting the losses that we see in the inter-month structure within the naphtha market.

Gary Clark:

I see. We have this tight European naphtha market. It looks like the Asian petrochemical demand is strong and we're seeing that flow from Europe over to Asia and we're seeing the blending going into the gasoline pool. In terms of the pet-chems industry then in Europe, these dynamics pricing out pet-chem end users from using naphtha in their cracking processes.

Barbara Fernandez-Pita:

Exactly. So when the gasoline naphtha spread is this wide, the blenders are going to be taking as much naphtha as they can, which means that there is not so much left for those petrochemical steam cracking facilities, which usually do rely on naphtha pretty heavily, especially in Europe. We've really seen that the propane naphtha spread, which is a spread that is widely followed by these steam cracking facilities, it reached all time lows in April and May, reaching almost minus $300 per metric ton. And it remains at around minus $190 per metric ton, which is over $90 lower than the same time last year.

Gary Clark:

So it's basically saying that the naphtha price is very high relative to the price of propane, right?

Barbara Fernandez-Pita:

Exactly. So when propane trades at a substantial discount to naphtha, flexible steam crackers will generally maximize LPG intake really to reduce those feedstock costs and improve margins where possible. Yeah, so as mentioned, this move was driven primarily by the strength in the naphtha market where prompt availability remains significantly more constrained than propane, which has really high US exports keeping its supply in Europe a lot more comfortable.

Gary Clark:

I see. And obviously a lot of factors here that you've been mentioning with respect to the naphtha market. I think another complexity is the very low Rhine water levels that we're seeing at the moment, which is an incredibly important transit route for naphtha inland demand centers within Europe.

Barbara Fernandez-Pita:

Yeah, exactly. I mean, the Rhine has been front and center really in discussions that we've been having over the last two months. So I think we've seen persistently low Rhine water levels, which reached almost 11 centimeters at the key COB choke point and which have been hovering around the 25 to 30 centimeter mark. We've really seen that these low levels have really hampered people's availability to move product down the Rhine. And naphtha was also impacted and it just meant that Amsterdam, Rotterdam, Antwerp inventories of naphtha were really quite high because people were unable to move that product down the Rhine. Reduced barge loading capacity also meant that people were faced with really high dead freight costs as well, or they had to make the decision between taking on that dead freight or choosing to use alternative modes of transportation on land, such as rail cars, which usually carry a higher delta over barge transportation. So really this also meant that downstream, a lot of petrochemical crackers were faced with a lack of feedstock.

Gary Clark:

So you mentioned how barges have to short load, there's a high cost to dead freight and inventory in Arrowhub can't get out and flow down the Rhine. So has there been any impact on pet-chem end users who are based along the Rhine at all?

Barbara Fernandez-Pita:

Yeah, so definitely didn't leave the petrochemical sector unscathed. So especially in the German hub, they face mounting production disruptions really. Critically low Rhine water levels really hampered the ability of these facilities to receive feedstock that they need to produce things like ethylene, propylene or butadiene. And it also caused a lot of technical outages because they were struggling to operate the water cooling facilities in the Rhine because of the reduced river flow and the higher water temperatures. And we also saw Lyondell actually declare force measure on supply from its butadiene extraction units at Wesseling in Germany, and it was actually attributed to these low Rhine water levels.

Gary Clark:

Okay. And thinking a little bit about what your sources are telling you around looking forward a little bit, you've talked about how naphtha is an important blending component for gasoline, particularly in the summer months. And as we move into winter, typically less naphtha goes into the gasoline pool because you use more butane. What are your sources telling you about how that seasonal transition as we move into winter will affect the naphtha markets?

Barbara Fernandez-Pita:

Yeah, so historically what we see during the winter season for naphtha is that petrochemical consumption increases really because there is, as you said, less naphtha going into the gasoline blending pool. Butane is instead maximized as a cheaper blending alternative that is also a Reid vapor pressure booster. But what's interesting about the transition into the winter gasoline blending season this year is that we've actually seen a bit of end August overhang and as a result of a lot of this storage building that we mentioned before. So players actually expect that September is going to be a bit tighter actually than August. And I think that this is also a function of the fact that the naphtha market is permanently being changed by the lower supply that is coming out of Hormuz, and we will have to see how the market fares looking into Q3 and Q4 this year.

Gary Clark:

Okay. Well look, I mean there's an incredible amount of different drivers within the naphtha market right now, and thank you, Barbara, very much for that take on what's happening. I'd like to thank our listeners and obviously we will continue to keep an eye on what's going on in European naphtha markets. So thank you very much.