Driving Discussions: US-Iran conflict reshapes the global naphtha market

[Music] Hello everyone and welcome to a podcast mini series that shines a light on the refined products market. This series is part of an exciting new addition to August consulting services offering the refined products outlook. With this expansion we can now provide focused dedicated insights across both crude oil and refined products making it easier for you to quickly find the information that matters most. This is the third episode in our series and if you haven't caught the first two definitely go back and give them a listen. My name is Errol Moussoff, I'm the Nat for analysts at August and I'll be your host today. I'm joined by Gide, our Nat for reporting in the London office and T.S. Videpti editor in Singapore covering elephant markets. We need to start with the development that is dominating the Nat for market right now and refined products markets in general which is the escalation of the US or on tensions and the effective closure of the straight of Hormuz. We've seen tank movements through Hormuz collapse, several key export hubs in the Middle East be damaged by drone strikes and loadings of Nat for crude incondenser slow to a trickle. Asia has taken the full force of this because nearly two thirds of its Nat for imports normally pass through the straight and as a result prompt spreads have blown out, cracks have surged, freight and war risk premiums have jumped and the physical balance is tightened extremely quickly. Europe and the US Gulf Coast by contrast remain largely buffered thanks to more diverse supply chains and stronger domestic production which is why cracks have diverged so sharply between regions. Asia is experiencing a true supply shock, the Atlantic basin is really only seeing secondary pricing effects. So given this backdrop I want to bring my colleague T.S. into the question and I want to ask what has the immediate response been from Patrick Michael producers in Asia, how are crackers adjusting rates or switching feeds where they can and how quickly do you expect this tightness to ripple through athlete and the broader polymer markets in Asia and globally? Hi thank you. I think for crackers in Asia are severely impacted by the supply disruption in the Middle East. Not just on NAFTA but we are also seeing propane supply disruptions are causing a lot of PDH shut down soon in the Chinese market. But yeah let's talk about crackers again. So NAFTA crackers have been reducing their operating rates because of supply disruptions. In just the first week of the war we have seen about five crackers in Asia Pacific including South Korea, one in South Korea and then we have two in Singapore, one in Thailand and another one in Indonesia. Five of them have really declared false moisture on their crackers but they didn't release shut down. They are just running at further reduction in terms of run rates because they still have NAFTA on hand. But again because previously when before the war the NAFTA inventory has been they didn't really import them much of NAFTA inventory because the NAFTA cracker margin has been in the negative zone since 2022 and hence when the war broke the supply disruption got impacted. That's where these crackers operators in Asia are the first to fill the pain. So we didn't release much of the impacts for China yet for now but reportedly there are some news or even some kind of reports that they will start to run at reduced rates if these Middle East tensions go on again. So another cracker in Taiwan actually also declared FM on hand of March that's for Mosah. So we can only expect more to come because supply disruptions in the Middle East are really not seeing any easing of anytime soon and this this report effect is already is really repertoothed at the link and also properly in prices. And we are also seeing polymer prices are increasing on just the first week of the war. So we are expecting that for now there won't be any firm discussions for properly at the link and even polymers because all the market players are adopting a WNC approach simply because there's no clear direction yet but we can expect that this Fistock cost will be the determined factor for Italy and the problem prices or even polymers are in the short term. Thank you Tias. That Petricama Corresponds kind of really highlights how broad this disruption is to markets in Asia. And you know on the back of this Asia is not only losing that for the region is also heavily dependent on Middle East and crude and condense. So we're dealing really with two sided supply squeeze imports of both crude and that first slowing at the same time and refiners across the Asia Pacific region have already started cutting refining rates because shipments are delayed and insurance costs rise. Among North East Asian importers Japan South Korea and Taiwan seemed to me to be most exposed. They have far less diversification and do not hold the same level of inventories or strategic reserves that China or Singapore can drop on. China may be able to absorb the shock for now, of course given with the buffer they have from the SPRs and wider nut for stocks. But even China will begin to fuel the strain of Middle East and flows remain constrained. With that in mind we can now step back and look at the wider structural themes shaping the NAP for markets into 2025 and 2026. We'll dig into how margins were already weakening further before the crisis began and how competition between NAP for LPG and ethane is evolving. In addition to this how the regional demand patterns are shifting on the back of a new layer of geopolitical risk. Further another topic worth discussing is how gasoline blending has become more important for keeping NAP for cracks in Europe elevated and giving them a floor provided the loss of steam cracking capacity in Europe that has been so dramatic over the past three years. So 2025 was widely seen as a weak year for petry chemicals but how much did poor cracking margins actually weigh on that for demand? We want to focus on both Europe and Asia so for the European side I'll ask GD. Yeah so normally NAP for tracks crude pretty closely because it's a direct derivative of the refining system but in 2025 that really that pattern broke essentially. What we saw was crude moving on its own set of geopolitical and supply driven stories while NAP was reacting in a completely different world. More defined by weak petry chemical demand poor cracking margins and persistent oversupply so to speak. Petry chemical buyers just weren't simply willing to chase NAP the higher. Crackers have been running at reduced rates, a lot have been shut. Margins for NAP the derived ethylene just haven't been strong for most of the year. So even when crude rallied NAP the just didn't have the demand base to follow. And at the same time competition from cheaper feedstocks like propane and butane weakened spreads and kept the lid on NAP the upside. And then when you when you have these sudden pockets of oversupply let's say after European refining maintenance ends all of that creates moments where crude price of a spike but NAP the would essentially weaken or even flip into contango. So the relationship loosened because the drivers for NAP the its own fundamentals are simply weaker than the macro drivers that push crude. I see and that's what we're seeing on our side as well. The predominant that driver for NAP for demand in Europe continues to be gasoline blending. It has been the week year in Europe for Patrick chemicals. Even despite the amount of collisions we've seen over the past few years. and the sole price determinant or the majority of what the term is not for price in Europe has been that demand for either reforming or blending strength and straight into the gasoline pool. How about on the Asian side, T.S? For the Asian side, despite the out of lockdown, in the past few years, because of the bad margins, we are still seeing a healthy kind of new commissioning of new crackers in China, especially in the South China. So overall, North-Aa demand should still increase in the next few years. It's just that it will be centralized around China for now instead of South Korea and Japan, because we are seeing South Korea and Japan are slowly facing out some of their older crackers, because of the margin concerns. And for Southeast Asia, we are also seeing the same pattern as what we see in South Korea and Japan. So China is still the main driver for North-Aa demand. I will say in the next few years. So it's just that for now, a lot of the crackers are still operating at reduced operating rates and hence in my hinder a bit of the North-Aa demand in the short term. But overall, I will say that demand for North-Aa is still on a healthy kind of group rate moving forward. Because most of the crackers in China, although previously they were saying that they want to crack it then, but following the US and China tensions back then, the tariff war, a lot of the crackers, the eating crackers are not really pushing forward their plans of building new eating crackers anymore. So there was just a tick to knock down crackers for now. Okay. And what you were saying there about extra additional capacity in Asia, mostly being built in China, can we expect to maybe see a decrease in steam cracking capacity in the other countries in Northeast Asia as China does outcompete with its large capacity additions in the next years? Oh, definitely, we will see the rest of the regions, especially the Southeast Asia side, and South Korea side to face out or even close down some of the older crackers. So overall, China will still have a higher operating rates as compared to the rest of the countries or the regions. Mainly it's because China's demand is still relatively healthy compared to the rest, and this actually tied back to the history of prior to 2020. Before 2020, China typically import anteline and propylene from Korea and also Southeast Asia. That was before the rapid expansion, but after 2020, we see a very fast pace of the expansions from China that actually replace all the exports from South Korea, Japan, and also Southeast Asia to China. So the rest of the regions are definitely struggling and hence definitely the crackers have to look down or even close. But China as a whole, they will still maintain a high operating rates. That's because China is still in deficit of anteline as a whole. In 2025, they actually imported about 2.8 million tons, the highest in their history. So that also explained that actually demand in China is still good, it's just that the crackers are expanding so fast in China that are weaving down on the rest of the countries and regions. Thank you, TS. And following from that, was 2025 primarily a Cyphercord downturn for Patrick chemicals? Are we starting to see more structural demand challenges from that additional capacity? I was saying 2025 actually is quite a pretty good year for anteline in Asia to be honest. Mainly it's because China experienced a slower expansion as compared to 2022 and 2023. Moving forward, 2026 to 2028, we will see another rise in expansions again. So the downturn will still prolong, that's what we think. And it will continue until 2029 before we see another recovery. If you were talking about demand side, there are still some of the downstream that will depend on the import of the anteline side. But at the same time, the expansions from the upstream which is at the inside will be placed some of the imports demand for China. So definitely the downturn will still be prolonged. We are seeing that things will start getting better in 2029 to 2030. Okay, that's great, TS. Thank you. So we've had a look at the patch chemical side. But of course, as mentioned earlier, gasoline has also been this year very strongly related to NAFTA values, particularly in Europe. There was an unseasonal rise in gasoline blending them on towards the end of the year. What drove up? And did it meaningfully shift market balances, yeah, so what happened at the end of 25, 25 was unusual because blending the wine tends to soften into winter. But instead, we saw a shop uptick driven by, I'd say, three main factors. So in Europe, a wave of refinery maintenance tightened gasoline supply at exactly the same time export demand picked up, especially from the US West Coast and Nigeria. So that pushed gasoline cracks to multi-month highs and made NAFTA suddenly attractive as a blending component. And a structural short at the same time of high octane material, meant refineries were pulling available blend stock, including NAFTA to meet specs. So at the same time, as that, the US blending market was also very active. We were seeing that the Atlantic Basin trading picked up and the US Gulf Coast exports of blending components nearly quadrupled. So in a short term, the market did tighten. We saw spread spike, barge markets firm and cracks strengthened, but it was fairly temporary, you know, by mid-December and into early 2026, refinery units restarted and inventory rebuilt and blending the wine started to soften again. So it did create a meaningful but brief tightening, but it was more of a seasonal flare up than a usual structural shift. Would you say the hike that we saw around that period was also as a result of, you know, many European refineries entering their natural blending window. As, you know, they wouldn't be expecting gasoline cracks to be so high around that time of year. Yes, yes, certainly. I think also around this period, we were seeing the dangote RFCC issues, which were well, very pretty pertinent to European gasoline market. We know that West Africa is one of the major, I think there's a second highest export destination for Europe. And that gasoline refined RFCC at dangote is pretty much the main gasoline producer. And when that was down, there was this incredible surge amongst the blending community and that for traders and the Blenstock operators in Europe to pump more and that was sending gas and that price is pretty high and shifting water West Africa. So I do believe that was quite a big thing. That cultivated, cultivated into quite a, a, a, how to say it, a quite exciting end. I mean, one of the lead operators in the NMDPRA end up losing his job and there was no longer export licenses from Europe to West Africa granted. So now that flurs has quite dipped pretty sharply. But before then, I believe that dangote RFC being down was quite a big, a big reason behind unseasonal high in the gasoline blending at that time. And that will be a continued theme, the importance of that RFCC for for the European gasoline market. So continuing on the gasoline theme, with the monstructurally declining across several major markets and neurofinding capacity coming online, not in Europe particularly, but in some of the other continents. What does that imply from that for rolling blending going forward? So the big picture is that I'd say that for rolling blending is becoming more variable and more opportunistic rather than structurally ground. Global gasoline demand is flattening and declining in key regions. Basically because of easy adoption, I think there's been more efficiency improvements and more biofuel mandates as well. So at the same time, new refining capacity in Asia and Middle East is adding hundreds of thousands of barrels of gasoline supplied into the pool in 2026. So when demand is falling and supply is rising, we're seeing blending economics weaken. So instead of it being a steady outlet for Naphtha, blending is becoming something that spikes during a fine return around and when octane markets get tight, it sees a limited pool. So there are some regional exceptions. North as Europe still has a structurally short high octane component market and that supports Naphtha's role there. And then also we've seen of recent the Venezuela situation, which means that they're growing demand for diluent. So for Naphtha, essentially, the US government recently removed a certain sanction that essentially means that anybody other than the sanctioned country like Iran and Russia, countries like Europe can now export Naphtha to Venezuela. But broadly, I would say that Naphtha blending demand, I would say it's going to be the reliable safety net that it once was, is becoming more of a swing outlet. So it's like helpful at times, but something that, I would say it's not something that the market can depend on, as gasoline is becoming a bit more structurally oversupplied. And going back to Venezuela, which happened quite recently. So the US Gulf Coast cracks did rally following the intervention in Venezuela given the re-entering of opportunity for re-exporting to the country. And more recently, I believe Trump announced or the Bureau in general announced that exports of Naphtha will no longer just be limited to Chevron, but also European Naphtha will now also be able to make its way to Venezuela. Of course, the economics behind this may not be favorable, but maybe there could be periods where maintenance in the Gulf Coast is high. Naphtha availability is low in the region, and maybe Europe can fill in some of those final barrels that are needed for Venezuela and diluent. Yes, certainly. I know that Trafigura are actively involved in Venezuela. I believe they already started trading some products from Europe over to the region. I think in regards to Naphtha, it's still dependent on whether the freight allows it to be workable for the arbitrage flow over to Venezuela. That's yet to be seen, but as you said, with US Refinementanence picking up, especially in this first quarter, going the second quarter, Naphtha availability in the region may start to dwindle a little bit, and that potentially could create the economic situation where it is more viable, and we may start to see the cargo's move over to Venezuela. So moving on from that discussion, we'll be switching over to speaking about some of the competition and risks of that for Naphtha market faces in the future. So Feedstock competition in recent years has intensified and become more topical than ever because of how tight margins are for steam cracking margins are. Is that now the biggest risk to Naphtha demand? Would you say even more so than weak end user demand? I'd say that Feedstock competition is a major risk, but I wouldn't say it's the primary one. The bigger one, the overarching issue is weak end user demand, especially in Petro-Germacepta. When downstream demand for plastics and derivatives is soft, it doesn't really matter what the feedstock slate looks like. We have crackers lowering the operating rates anyway, and the overall consumption of Feedstock drops all together. So that's the fundamental demand destruction that we saw throughout 2025. Feedstock competition on the other hand though, it changes who gets the shrinking market share. We propane and butane, and then in Asia we were seeing more ethane. These are often cheaper and offer better margins, so yeah, they definitely pressure Naphtha and reduce its competitiveness, but that dynamic only matters within the portion of the demand that still exists. If cracker utilization is already collapsing because of weak downstream demand, then Naphtha suffers regardless of whether it propane is cheaper. That's actually okay. And that is true, those tend to move together quite more often than not. So another key theme of 2025, of course, with President Trump's re-election, has been the geopolitical risks and how global politics have started to reshape some of the Naphtha flows that we've been seeing prior to his election. So one of those, of course, that we touched on was Venezuela. And from that also, prior to the Venezuela intervention, also the sanctions on Rosneft and Bluecoil. And although we didn't account for a significant part of the Naphtha supply to Asia, it seems like buyers, Asian buyers of Russian Naphtha have been more weary and careful even though even for barrels that are not sanctioned. So we've been seeing some Taiwanese petrochemical plants cancel their spot tenders for Russian Naphtha in the lead up to 2026 and weaker demand on the Chinese side as well. Later on, we've seen kind of these Russian barrels make their ways into countries and they have become this sort of swing factor in the regional cracks just because of firstly their significant volume and secondly due to their large discount. So it's become a really strong determining factor for what the price dynamics will be between Singapore and Japan as depending on where the barrels are rooted to that month can influence the regional cracks, brod quite severely. And that's why we've been seeing some cases of Singapore and Japan cracks not moving the same directionally month for month. So moving on to a more forward-looking perspective before we close out. So Asia Pacific still dominates global Naphtha demand and that was really pronounced in the aftermath of the escalation between the US and Iran as we saw the cracks sort of multi-month highs in just the space of a couple of days. So on the Naphtha side of course Asia remains very reliant on the Middle East with the majority of Naphtha supply coming from that region which has now severely been constrained and depending on the severity of the conflict and how long we expect the straight to be closed. We may see as little as as 20% of usual flows coming out of the straight of Femuse. And how does that translate on the petrochemical side T.S. We know we've already seen some rate cuts in the aftermath of the news but can we see something more severe if this persists like actual closures of steam crackers? Yeah, as Naphtha is really an important fistop to Asia especially in the Korea, Japan and Southeast Asia and towards a certain extent to China too. So these few days we have been hearing that the Koreans are taking the lead to reduce their operating rates as low as from 70 or even 80% to 60%. We see for news that one of the producers, the key producer in Yusu has declared FM by running at a minimum rate for all the petrochemicals units in their complex. The reason we Bing, sangat berlaku. Ini adalah terlalu jalan dari fishtok atau hal-hal yang berlaku, kemudian bergantungan ke metodean. Jadi, perkara yang lain yang saya ingin mencari adalah. tapi banyak operasi krekkers terhadapkan bahawa. kontemplating, bukan hanya atas kerenang. Dia berhati-hati-hati, melihat ke percayaan. dia dan potensi diperlukan. Jadi, ia berhati-hati-hati sangat diperlukan di percayaan di Malaysia. Jadi, pada terlalu jalan, kami juga memiliki. saya berhati-hati-hati, percayaan diperlukan. saya berhati-hati, melihat kemudian berhati-hati, melihat kemudian. dia akan berhati-hati, melihat kemudian berhati-hati, melihat. dia akan berhati-hati, melihat kemudian berhati, melihat. dia akan berhati-hati, melihat, melihat, melihat, melihat, melihat. Well 脱掉an Guevah Sangka Omei 我跟你講 Terima kasih They are embracing for a very heavy ton around It's a schedule turning around for their crackers during March and April So for now, Japan's side we don't really hear much of the anticipation of closing down our plans yet But of course, rich cuts are inevitable This thing is something that we have to we have to monitor So just before we close out looking further into 2026 global steam cracking capacity is projected to increase by around 5 million tons a year with most of the capacity coming online being in China as you mentioned before T.S How comfortable should the market be with the amount of steam cracking capacity scheduled for 2026 Given that margins are so weak at the moment and have been weak kind of all throughout 2025 Can we expect these margins to recover anytime soon Yeah, actually we are really quite pessimistic as for now the thing is not just about the war or anything the thing is about the rapid expansions in China so we are expecting that the recovery in 2029 to 2030 Yeah, so um It's just not China that is okay, I have to say again that China is adding a lot of capacities at the moment but South Korea is also adding another one that is coming up this year despite their rationalization So we might see even more supplies coming out from South Korea and that will also wait on the ethylene margins as well So moving forward as long as China is still expanding we might not see the recovery to be so soon the expansion phase will end on 2028 and that's where we will see a recovery later on So that's why we project that the recovery will happen only on 2029 to 2030 Okay, thank you to you That's all that we have for you today Thank you to both GD and to us for coming on and speaking to us If you're enjoying this series so far please stick around and we'll be recording a new episode soon Also you can find more information about our new refined products outlook service For those of you who would like to access don't hesitate to get in touch at our email which is oil hyphen product at augustmedia.com Thank you very much Thank you [MENGIEFAN]