E/W spread corrects but rising cash diffs keep sustaining MED to Asia arbitrage.

Commentary summary:

– European markets outperformed the MOPJ complex recently, with the full curve in backwardation.

– E/W forward curve flattens, aligning with the historical average of $19/mt for the E/W spread across 2025.

– Firm cash differentials in Europe are expected in the coming weeks, after a $10/mt uptrend during December.

– New estimations suggest Asian naphtha demand is projected to grow significantly during 2025.

The naphtha market traded higher in both cracks and timespreads over the past week, driven by an arbitrage to Asia that remains open from the MED for LR2s, although margins are tightening compared to the MR option to NWE.

The biggest rally occurred in the European market, which is now trading in backwardation across the entire curve, avoiding the prompt contango observed in recent weeks.

(CIF NWE timespreads traded higher during the week, proving more supported than the MOPJ in recent sessions)

Europe not only settled in backwardation but has also outperformed the MOPJ complex in recent sessions across all indicators, putting downward pressure on the E/W spread in the early months of the forward curve.

Currently, only the December contract, about to settle, remains above $20/mt, and it is noteworthy how the curve has flattened in recent weeks, holding steady at approximately $19/mt throughout 2025. This aligns with the historical average of the E/W, as shown in its seasonal chart.

(E/W will close the year near its historical average)

(The E/W forward curve has also flattened in recent sessions for the entire year of 2025)

Observing the current rally in both markets, we believe the greatest upward potential lies in European physical premiums, which have surged sharply in December from -$10 to $0/mt.

As the NWE market negotiates January deliveries, the market is gradually strengthening, and the margin for the northern alternative is narrowing compared to the arbitrage to Asia.

In the coming weeks, we anticipate firm cash differentials in Europe, which will increase the cost of arbitrage.

If Asia intends to continue competing for MED cargoes, it must sustain the E/W to keep the arbitrage open. Based on sustained demand from Asia for February and March deliveries, we believe a rebound in the E/W toward Q1 levels is likely in the short term.

(Physical premiums recover in NWE after a very week month)

Looking forward to next year, naphtha demand fundamentals are expected to diverge significantly between the European and Asian markets. In Europe, the ongoing trend of chemical plant closures is likely to persist, primarily affecting older and less efficient facilities.

Meanwhile, Asia’s outlook for continued growth has been emphasized in recent reports from CNOC and Sinopec, with China’s naphtha demand growth estimates pointing to a substantial increase.

Demand for petrochemical feedstocks, such as naphtha and LPG, is projected to surge by 55%, driven by China’s expanding plastics and chemical industries by 2035.

Based on these estimates, we anticipate a strong Asian market vying for Western supply, which will need to keep the E/W supported if 2025 is to resemble Q4 of the current year in terms of arbitrage.

(Arb to Asia remains open from Europe but stronger FOB in Europe and weaker E/W has narrowed the differential with NWE alternative recently)

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Source: Sparta Commodities