February naphtha refining margin was at minus US$7.50/bbl, compared with minus US$6.70/bbl at on 28 January. This weakening of the European naphtha crack spread is surprising amid stronger market fundamentals, as per market participants in ICIS. Higher gasoline prices, resulting in a wider gasoline-naphtha price spread, raise the incentive to purchase naphtha for blending. In turn, this should see a firming of the naphtha refining margin rather than a weakening.
While prices for rival feedstock propane remain significantly below naphtha, rendering the former the first choice for petrochemical buyers, a slight recovery of liquefied petroleum gas (LPG) values and a narrowing of the propane-naphtha spread should result in a strengthening naphtha refining margin. Further supporting the idea of a stronger crack spread is a wide-open arbitrage to Asia. On Tuesday morning, the east-west price spread was at US$17.50/ton. While dependent on factors such as freight rates, a spread of US$15-20/ton is usually deemed necessary to make sending volumes east financially worthwhile. Additionally, crude oil values have remained relatively stable from 16.30 GMT on Monday, also offering no explanation for the weaker naphtha crack spread.