As we witness global naphtha cracks hitting highs since March, we can see that seaborne naphtha imports have had a stellar recovery so far this year, already hitting 3.41 mn b/d in May on a kbd basis and are expected to continue strong in July. Reduced arrivals in June have likely contributed to the current price rally.
Strong prices driven by petchem demand in Asia and gasoline blending in Europe have incentivised global refiners to make naphtha at the expense of poorly performing transportation fuels, mainly jet and diesel which have seen little to no recovery outside of the US due to continued travel restrictions. When combining seaborne jet and naphtha imports, we can clearly see how the share of the latter is steadily increasing; an indication of refineries working hard to minimise production of jet and make more naphtha.
As reforming margins stay strong in tandem with surging Atlantic Basin gasoline demand and European refiners return from maintenance, we see heavy naphtha grades head toward the reformers in Northwest Europe for blending into gasoline.
The supply story
Although we have seen a decline in seaborne naphtha exports from Qatar, other countries such as Russia, UAE, US, Algeria and India have responded to the pricing strength by increasing exports, more than making up for Qatari lost volumes.
And even as PADD 1 gasoline stocks are on the rise, we see global gasoline margins push higher alongside prolonged demand from the main Atlantic Basin hot spots which will only continue to pull naphtha into gasoline blending hubs.
One contributing factor to the strength in gasoline cracks is the lack of supplies from Asia. Even with the US driving season well underway, the latest crack signals cannot be ignored and would expect any refiner to continue to respond with higher gasoline production.
As the battle for the barrels continues, we see solid room for gasoline strength beyond peak driving season. These forces combined with strong petchem demand and short supply of alternative LPG as feedstocks will likely translate to increased tightness in the naphtha complex and can only lead refiners to maximise light yields at the expense of middle distillates.