February 26, 2025

Naphtha and gasoline steady, distillates strong, but HSFO softens on geopolitics

Market & Trading Calls

Light Ends:

Flat-to-bearish West of Suez naphtha cracks w/w until March, after which cracks will firm m/m on spring maintenance and seasonal blending demand.
Bearish East of Suez w/w and through March as easing Middle Eastern, Russian maintenance rubs up against still meagre cracking demand and switching to LPG as heating demand dissipates.
Flat-to-bearish E/W spread premium w/w through March as regional fundamentals diverge next month with the West tightening and the East lengthening, keeping US and Med barrels aimed firmly at NWE.

Gasoline:

Neutral West of Suez cracks: Atlantic Basin cracks continued to lose ground, and we do not expect sustained upside over the next couple of weeks. While refinery maintenance and closures are set to provide some support on the supply side, demand momentum will only pick up by Q2, keeping the market in check. The biggest question mark remains Dangote, with the fate of this year’s summer season hinging on the refinery’s performance.
Neutral to bullish Asian gasoline: the Singapore crack posted another week of gains, with tightening balances and constrained Chinese exports set to support the recovery in 92 RON prices further into March.

Middle Distillates:

Prompt Atlantic Basin cracks remain supportive, but forward curve sell-offs signal growing recognition of a softer Q2/Q3.
Increasing normalization along USGC-NWE and East-West shipping routes will accelerate resupply into Northwest Europe (NWE).
Singapore ULSD cracks mask broader weakness in the EoS high-sulfur distillate complex.

Residue:

Neutral to slightly bearish global HSFO cracks: HSFO cracks have softened across key markets amid peace talks regarding the Russia-Ukraine war. While near-term supply appears sufficient, and demand remains weak, geopolitical uncertainties and refinery maintenance in key HSFO-producing regions add supply risks.
Neutral global VLSFO cracks: Despite a recent uptick in the East of Suez, VLSFO cracks lack firm support for a sustained recovery. USGC VLSFO cracks are expected to hold steady in the coming weeks, while NWE cracks may trend lower amid a softening market outlook.

Light Ends: E/W naphtha divergence set to continue through March

Light naphtha cracks ($/bbl)

Source: Kpler calculations using Argus Media prices

Global naphtha cracks unexpectedly edged higher w/w with rising values in the West offsetting the dip in the East, adding to a growing E/W divergence.

West of Suez

USGC cracks firmed the most, with price action playing catch-up after trading at a sizeable discount to European cracks in previous weeks. Indeed, fundamentals in the US will remain weak in the short term with refinery maintenance continuing to ease, spot arbs closed to Europe and Asia, and summer blending demand only beginning from end-March/early April.

However, USGC cracks will firm m/m from mid-March as seasonal maintenance picks up and Lyondell shuts down its Houston refining assets, curtailing local naphtha output. Meanwhile, some gasoline producers will begin switching to summer grade production from end-March, supporting blending demand into April.

In Northwest Europe (NWE), cracks found support from the jump in US values, despite European refinery maintenance ticking lower w/w and ARA naphtha stocks remaining bloated versus seasonal norms, as ongoing unplanned outages in Germany continue to add support to inland markets.

NWE cracking demand remains supressed amid propane’s ongoing advantage, high energy costs and flat petchem growth, with utilization rates averaging 70% in recent weeks (Argus). US ethylene and derivative exports are set to increase over the coming weeks as turnarounds ease, which will weigh on European cracking margins next month. Furthermore, with Total’s Gonfreville cracker (520 kt/year; 41 kbd naphtha demand) undergoing maintenance (March-April) and propane set to remain advantaged as heating demand wanes, naphtha cracking will decrease m/m.

NWE gross complex steam cracking margins per ton of ethylene ($/t)

Source: Kpler calculations using Argus Media prices

Nonetheless, NWE cracks will increase m/m amid rising spring refinery maintenance, peaking in H1 March, and the switch to summer gasoline production from H2 March aiding blending demand, which combined will support cracks to levels inline with the five-year average, assuming Dangote only slowly ramps up.

Meanwhile, in the Med, the uptick in refinery maintenance in the coming weeks, combined with a sizable drop in Middle Eastern turnarounds and ongoing meagre naphtha cracking margins in Asia will help ensure the East/West spread remains close to low single-digit premium through March. As such, spot Med cargoes will be incentivised to remain in the West for summer blending. This structure should remain largely intact until mid-April, after which Middle Eastern maintenance increases and fresh standalone cracking capacity in China ramps up, increasing East Asian import requirements.

Med naphtha arbs ($/t)

Source: Kpler calculations using Argus Media prices

East of Suez

Rising output in the Middle East as refinery turnarounds wind down, still high UAE and Singapore stocks despite the w/w dip, and ongoing poor naphtha cracking margins in Asia pulled East of Suez cracks moderately lower, despite firming values in the West.

Although some supply concerns relating to Russian and Iranian naphtha exports remain present amid refinery outages, ice-related delays to loadings in Ust-Luga and US sanctions, Russian exports should pick up through March as unplanned maintenance winds down and icy conditions end, barring fresh attacks on assets by Ukraine.

Meanwhile, despite naphtha cracking margins remaining more profitable than propane on a gross basis, butane has taken the lead, prompting at least one buyer in South Korea to switch to bidding for the lighter feedstock this week (industry report). Moreover, net naphtha cracking margins remain well below typical breakeven levels and increased US tariffs on China and fresh integrated cracking capacity ramping up (Yulong No.2, 1.5 Mt/year next month) will help ensure utilization rates at standalone units ex-China remain suppressed next month, despite a seasonally lighter turnaround period.

Northeast Asian gross complex steam cracking margins per ton of ethylene ($/t)

Source: Kpler calculations using Argus Media prices

Indeed, with Chinese propane demand growth slowing y/y amid cracker conversions and delayed PDH projects, flexi-crackers in Asia should begin favouring propane again from mid-March as seasonal heating demand in the northern hemisphere dissipates, weighing on East of Suez cracks m/m as Middle Eastern and Russian exports grow.

Global naphtha cracks ($/bbl)

Source: Kpler calculations using Argus Media prices

Gasoline: E/W divergence resurfaces amid lacklustre Atlantic Basin markets

Global Gasoline Cracks ($/bbl)

Source: Kpler based on Argus Media

West of Suez

In the US, the RBOB crack was down by $1.30/bbl w/w to $7.10/bbl, whereas the Gulf Coast crack lost $0.55/bbl to $9.45/bbl. Seasonal maintenance is now past its peak, with offline capacity set to fall by over 375 kbd w/w as per IIR data. Further declines are expected in the subsequent week before turnarounds intensify again over March, which should help curb the destocking of winter-specification gasoline this month.

With demand still seasonally poor, and East Coast stocks at multi-year highs rendering the transatlantic arbitrage unworkable, we believe the upside for US cracks will remain capped for now. More support is expected once refiners switch to summer specification gasoline production from March/April.

Freight Adjusted Arb Incentive: 3DMA of Gasoline reg RBOB NYH barge fob 20 days fwd vs Gasoline Eurobob non-oxy NWE barge ($/bbl)

Sources: Kpler calculations using Argus Media pricing, McQuilling freight data; Shipping costs calculated based on MR freight rates

On the other side of the Atlantic, cracks were down by $0.95/bbl w/w to $10.25/bbl in Northwest Europe (NWE), whereas in the Mediterranean (Med) cracks slid by $0.15/bbl w/w to $8.40/bbl, continuing their downward correction after rallying at the start of the month.

Part of that strength was driven by US tariff rhetoric, but also potential concerns over high-octane blendstock availability. Notwithstanding, our view remains more tempered, with both key European regions still grappling with considerable length and seasonal maintenance peaking only in April.

Looking at inventories, gasoline stocks held in independent storages in the Antwerp-Rotterdam-Amsterdam (ARA) hub fell by about 9.5% last week, marking the first draw in seven weeks, but they remain at historically elevated levels, while European gasoline exports have been markedly low so far this year.

ARA: gasoline stocks in independent storages (Mb)

Source: Kpler calculations based on Insight Global data

The key piece of the puzzle for European refiners remains the fate of Nigeria’s Dangote. The past two months have seen the refinery’s gasoline exports fall back to negligible levels, whereas an increase in outflows of dirty products hints at some operational setbacks. Should problems linger, there is a case to be made for increased bullishness in Atlantic Basin markets, but otherwise, we struggle to see much support materialising before the end of Q1.

East of Suez

The Singapore gasoline crack was up by $1.60/bbl w/w to $10.05/bbl. Our stance remains constructive, with fundamentals pointing to a supported market through March.

With the quick deterioration in China-Singapore arbitrage incentives, Chinese gasoline exports are currently tracking at a five-month low, moderating light distillates inventories in the wider region. Furthermore, looking at maintenance in the region, March should mark a tangible increase in planned turnarounds, which will peak in May, adding further support from the supply side.

On the demand side,  stockpiling ahead of Eid festivities is expected to sustain elevated regional demand, although our data still shows flattish imports into Indonesia (and falling net exports out of Singapore), while an outage at Kuwait’s Mina Al-Ahmadi that spurred prompt buying in the second half of January has been resolved (see East of Suez).

Middle Distillates: ICE Gasoil gains, but forward market feels the weight of returning flows

West of Suez

ICE Gasoil market structure ($/t)

Source: Kpler calculations using Insights Global data

Bullish momentum persists, with the prompt market structure reaching an 11-month high above $11/t. A confluence of supply-side disruptions has reinforced crack spreads: offline capacity in the West of Suez (WoS) has surged to 4.79 Mbd, a 3% year-on-year increase, while weekly cargo arrivals into NWE have declined steadily since November to just 1.74 Mbd — 18% below the 2024 weekly average.

We maintain the view that the forward curve appears overbought, despite recent price action following some refineries emerging from maintenance. Sell-offs have begun in the M1/M2 spread, and the six-month timespread has weakened by $6.5/t w/w to $37.25/t. The market cannot overlook the persistent ARA surplus much longer — stocks remain elevated at 19.3 Mbbls, 36% above seasonal norms. This imbalance is unlikely to ease meaningfully beyond routine maintenance-driven drawdowns.

PADD 3-NWE gasoil freight-adjusted arbitrage 3 day moving average($/bbl)

Source: Kpler calculations using Argus, McQuilling data

Two critical factors will impede a more substantial stock reduction. First, weakening HOGO spreads will ease the reverse transatlantic arbitrage, facilitating a resumption of PADD 3-UKC flows. Next, the widening E/W swap, the seasonal transition to summer-grade cargoes, and growing Suez Canal transit use (cutting voyage durations by 12-15 days) — will enhance East of Suez suppliers' ability to replenish the Atlantic Basin.

East/West gasoil voyages vs E/W swap (RHS)

Sources: Kpler, Argus Media pricing

East of Suez

The Singapore spot market remains firm at the prompt, with Chinese refiners set to export just 670 Kt this month — a sharp 69% y/y decline. Structural constraints persist, particularly for independent refiners in Shandong, who continue to struggle with restricted feedstock procurement due to higher HSFO import taxes and recent US OFAC and EU sanctions on tankers.

East of Suez gasoil/diesel sulfur spreads ($/bbl)

Source: Argus Media pricing

However, underlying weakness is emerging for higher sulfur grades. Rare cargo offers from Taiwan (CPC) and Vietnam (Nghi Son) indicate a growing regional surplus amid lackluster demand. Consequently, sulfur spreads are expected to widen. Pertamina’s restart of CDU #2 at the 348 kbd Cilacap refinery will reduce its reliance on 500 ppm gasoil imports, further exacerbating supply pressure. This trend is already reflected in the Singapore market, where the 10/500 ppm sulfur gasoil spread has widened to an eight-month high of 40 cents/bbl.

Residues: Global HSFO cracks weaken amid peace talks

East of Suez

Global high-sulfur fuel oil (HSFO) cracks have softened since late last week, following discussions between the US and involved parties on a potential resolution to the Russia-Ukraine war. Singapore's HSFO cracks fell by $0.60/bbl w/w on Friday before declining a further $1.40/bbl over the first two trading days this week. Fujairah’s fuel oil stocks fell 2% w/w but remain close to 8-month highs (FOIZ), while Singapore's inland fuel oil inventories have been stable year-to-date (Enterprise Singapore). While supplies appear adequate for now, rising offline refinery capacity in Russia this month, coupled with ongoing maintenance at Middle Eastern refineries, is expected to support HSFO cracks in the coming weeks.

Singapore's very low sulfur fuel oil (VLSFO) cracks increased slightly by $0.25/bbl w/w last week before shedding $0.55/bbl in the first two trading days this week. Increased domestic production and subdued demand have shifted Chinese VLSFO prices from premiums to discounts against Singapore since early January, halving import volumes from November levels. VLSFO bunker sales in Fujairah fell 2% m/m and 8% y/y in January (FOIZ), while Singapore sales remained flat m/m but contracted by 15% y/y (MPA). Despite a recent uptick, VLSFO cracks still lack the necessary support for a sustained recovery.