US-Iran conflict reshapes the global naphtha market

Erol: Hello, everyone. And welcome to our podcast mini-series that shines a light on the refined products market. This series is part of an exciting new addition to Argus 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 Erol Musov. I'm the naphtha analyst at Argus, and I'll be your host today. I'm joined by Jide, our naphtha reporter in the London office, and TS, the deputy editor in Singapore, covering olefin markets.

We need to start with the development that is dominating the naphtha market right now and refined products markets in general, which is the escalation of the U.S.-Iran tensions and the effective closure of the Strait of Hormuz. We've seen tanker movements through Hormuz collapse, several key export hubs in the Middle East be damaged by drone strikes, and loadings of naphtha crude and condenser slow to a trickle.

Asia has taken the full force of this because nearly two-thirds of its naphtha imports normally pass through the Strait, and as a result, prompt spreads have blown out, cracks have surged, freight and war risk premiums have jumped, and the physical balance has tightened extremely quickly. Europe and the U.S. 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, TS, into the question. And I want to ask, what has the immediate response been from petrochemical 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 ethylene, propylene, and the broader polymer markets in Asia and globally?

TS: Hi. Thank you. I think for crackers in Asia are severely impacted by the supply disruption in the Middle East, not just on naphtha. We are also seeing propane supply disruptions are causing a lot of PDH shutdowns soon in the Chinese market. But, yeah, let's talk about crackers again.

So, naphtha 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 already declared force majeure on their crackers, but they didn't really shut down. They are just running further reduction in terms of run rates because they still have naphtha on hand.

But again, because previously when before the war, the naphtha inventory has been...they didn't really import that much of naphtha inventory because the naphtha cracker margin had been in the negative zone since 2022. Hence, when the war broke, the supply disruption got impacted. That's where these crackers operators in Asia are the first to feel the pain. We didn't really see 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 10th of March. That's Formosa. So, we can only expect more to come because supply disruptions in the Middle East are really not seeing any easing off anytime soon. And this ripple effect is really ripple through the ethylene and also propylene prices. And we are also seeing polymers 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 propylene, ethylene, and even polymers because all the market players are adopting a wait and see approach, simply because there's no clear direction yet. But we can expect that this feedstock cost will be the determine factor for ethylene and propylene prices or even polymers in the short term.

Erol: Thank you, TS. That petrochemical response kind of really highlights how broad this disruption is to markets in Asia. And on the back of this, Asia is not only losing naphtha. The region is also heavily dependent on Middle Eastern crude and condensate. So, we're dealing really with a two-sided supply squeeze, imports of both crude and naphtha 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 Northeast Asian importers, Japan, South Korea, and Taiwan seem 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 draw upon. China may be able to absorb the shock for now, of course, given with the buffer they have from the SBRs and wider naphtha stocks. But even China will begin to feel the strain if Middle Eastern flows remain constrained.

With that in mind, we can now step back and look at the wider structural themes shaping the naphtha markets into 2025 and 2026. We'll dig into how margins were already weakening further before the crisis began, and how competition between naphtha, LPG, and ethane is evolving. And in addition to this, how the regional demand patterns are shifting on the back of a new layer of geopolitical risk. And further, another topic worth discussing is how gasoline blending has become more important for keeping naphtha cracks in Europe elevated, and giving them a floor, provided the loss of steam cracking capacity in Europe that has been so thematic over the past three years.

So, 2025 was widely seen as a weak year for petrochemicals, 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 Jide.

Jide: Yeah. So, normally, naphtha tracks crude pretty closely because it's a direct derivative of the refining system. But in 2025, that pattern broke essentially. What we saw was crude moving on its own set of geopolitical and supply-driven stories while naphtha was reacting in a completely different world, more defined by weak petrochemical demand, poor cracking margins, and persistent oversupply, so to speak.

Petrochemical buyers just weren't simply willing to chase naphtha higher. Crackers have been running at reduced rates, a lot have been shut, margins for naphtha-derived ethylene just haven't been strong for most of the year. So, even when crude rallied, naphtha 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 naphtha's upside.

And then when you have these sudden pockets of oversupply, let's say after European refining maintenance ends, all of that creates moments where crude prices would spike, but naphtha would eventually weaken or even flip into contango. So, the relationship loosened because the drivers for naphtha, its own fundamentals, are simply weaker than the macro drivers that push crude.

Erol: I see. And that's what we're seeing on our side as well. The predominant driver format for demand in Europe continues to be gasoline blending. It has been a weak year in Europe for petrochemicals even despite the amount of closures we've seen over the past few years. And the sole price determinant or the majority of what determines naphtha price in Europe has been that demand for either reforming or blending straight into the gasoline pool. How about on the Asian side, TS?

TS: For the Asian side, despite there are a lot of closures in the past few years because of the bad margins, we are still seeing a healthy new commissioning of new crackers in China, especially in South China. So, overall naphtha 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 phasing 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 naphtha 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 a reduced operating rate. Hence, it might hinder a bit of the naphtha demand in the short term. But overall, I would say that demand for naphtha is still on a healthy kind of growth rate moving forward. Because most of the crackers in China, although previously they were saying that they want to crack ethane, but following the U.S. and China tensions back then, the tariff war, a lot of the ethane crackers are not really pushing forward their plans of building new ethane crackers anymore. So, they will just stick to naphtha crackers for now.

Erol: Okay. And what you were saying there about 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?

TS: Definitely, we will see the rest of the regions, especially the Southeast Asia side and South Korea side to phase out or even close down some of the older crackers. So, overall, China will still have a higher operating rate 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.

This actually ties back to the history prior to 2020. Before 2020, China typically imports ethylene and propylene from Korea and also Southeast Asia. That was before the rapid expansion. But after 2020, we see a very fast pace of expansion from China that actually replaced 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 lock down or even close. But China as a whole, they will still maintain a high operating rate. That's because China is still in deficit of ethylene as a whole.

In 2025, they actually imported about 2.8 million tons, the highest in their history. So, that also explains that actually demand in China is still good. It's just that the crackers are expanding so fast in China that are wearing down on the rest of the countries and regions.

Erol: Thank you, TS. And following from that, was 2025 primarily a cyclical downturn for petrochemicals, or are we starting to see more structural demand challenges from that addition in capacity?

TS: I would say, 2025 actually is quite a pretty good year for ethylene 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 ethylene side. But at the same time, the expansions from the upstream, which is ethylene side, will replace some of the import demand for China. So, definitely, the downturn will still be prolonged. We are seeing that things will start getting better in 2029 to 2030.

Erol: Okay. That's great, TS. Thank you. So, we've had a look at the petrochemical side. But of course, as mentioned earlier, gasoline has also been this year very strongly related to naphtha values, particularly in Europe. There was an unseasonal rise in gasoline blending demand towards the end of the year. What drove that? And did it meaningfully shift market balances, Jide?

Jide: Yeah. So, what happened at the end of 2025 was unusual because blending demand tends to soften into winter. But instead, we saw a sharp 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 U.S. West Coast and Nigeria. So, that pushed gasoline cracks to multi-month highs, and made naphtha suddenly attractive as a blending component. And a structural short at the same time of high-octane material meant refiners were pulling available blend stock, including naphtha, to meet specs.

So, at the same time as that, the U.S. blending market was also very active. We were seeing that the Atlantic basin trading picked up, and the U.S. Gulf Coast exports of blending components nearly quadrupled. So, in the short term, the market did tighten. We saw spreads spike, barge markets firm and crack strengthened. But it was fairly temporary. By mid-December and into early 2026, refinery units restarted and inventories rebuilt, and blending demand 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.

Erol: Would you say the hike that we saw around that period was also as a result of many European refiners entering their natural blending window, as they wouldn't be expecting gasoline cracks to be so high around that time of year?

Jide: Yes, certainly. I think, also around this period, we were seeing the Dangote RFCC issues, which were pretty pertinent to European gasoline market. We know that West Africa is one of the major...I think it's the second highest export destination for Europe. And that gasoline 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 naphtha traders, and the blend stock operators in Europe to pump more. And that was sending gas and naphtha prices pretty high, and shifting more to West Africa.

So, I do believe that was quite a big thing. That cultivated into quite a...how to say it, a quite exciting end. I mean, one of the lead operators in the NMDPRA ended up losing his job, and there was no longer export licenses from Europe to West Africa granted. So, now, that flow has quite dipped pretty sharply. But before then, I believe that Dangote RFCC being down was quite a big reason behind unseasonal high in gasoline blending at that time.

Erol: And that will be a continued theme, the importance of the RFCC for the European gasoline market. So, continuing on the gasoline theme, with demand structurally declining across several major markets and new refining capacity coming online, not in Europe particularly, but in some of the other continents, what does that imply for naphtha's role in blending going forward?

Jide: So, the big picture is that, I'd say naphtha's role in blending is becoming more variable and more opportunistic rather than structurally strong. Global gasoline demand is flattening and declining in key regions basically because of EV 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 supply 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, you know, blending is becoming something that spikes during refining turnarounds, and when octane markets get tight, it sees a limited pool. So, there are some regional exceptions, you know, Northwest 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 there's a growing demand for diluents for naphtha, essentially. The U.S. government recently removed a certain sanction that essentially means that anybody other than the, you know, sanctioned country like Iran and Russia, you know, so, countries like Europe can now export naphtha to Venezuela.

But broadly, I would say that naphtha blending demand, I wouldn't say it's going to be the reliable safety net that it once was, is becoming more of a swing outlet, you know. So, it's, like, helpful at times, but something that I would say is not something that the market can depend on as, you know, gasoline is becoming a bit more structurally oversupplied.

Erol: And going back to Venezuela, which happened quite recently. So, the U.S. 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 Venezuelan diluents.

Jide: 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 U.S. refinery maintenance picking up, especially in this first quarter, going into 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 cargos move over to Venezuela.

Erol: So, moving on from that discussion, we'll be switching over to speaking about some of the competition and risks that the naphtha market faces in the future. So, feedstock competition in recent years has intensified and become more topical than ever because of how tight steam cracking margins are. Is that now the biggest risk to naphtha demand, would you say, even more so than weak end user demand?

Jide: 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 the petrochemical sector. When downstream demand for plastics and derivatives is soft, it doesn't really matter what the feedstock slate looks like. We have crackers lowering their operating rates anyway, and the overall consumption of feedstock drops altogether. So, that's the fundamental demand disruption that we saw throughout 2025.

Feedstock competition, on the other hand, though, it changes who gets the shrinking market share. Propane and butane, and then in Asia, we're seeing more ethane. These are often cheaper and offer better margins. So, they definitely pressure naphtha and reduce its competitiveness, but that dynamic only matters within the portion of demand that still exists. If cracker utilization is already collapsing because of weak downstream demand, then naphtha suffers regardless of whether propane is cheaper.

Erol: 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'd been seeing prior to his election. 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 Lukoil. Although they didn't account for a significant part of the naphtha supply to Asia, it seems like Asian buyers of Russian naphtha have been more weary and careful 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 these Russian barrels make their ways into some 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 routed to that month can influence the regional crack spread quite severely. And that's why we've been seeing some cases of Singapore and Japan cracks not moving the same directionally month on 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 U.S. and Iran, as we saw the cracks saw to multi-month highs in just the space of a couple of days. 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. Depending on the severity of the conflict and how long we expect the strait to be closed, we may see as little as 20% of usual flows coming out of the Strait of Hormuz. How does that translate on the petrochemical side, TS? 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?

TS: Yeah. As naphtha is really an important feedstock to Asia, especially in Korea, Japan, and Southeast Asia, and to a certain extent to China, too, these few days we have been hearing that the Koreans are taking the lead to reduce their operating rates, as well as from 70% or even 80% to 60%. Received a news that one of the key producers in Yeosu has declared FM by running at a minimum rate for all the petrochemical units in their complex. The reason being — it's very obvious — is the lack of the feedstock or the delay of the March arrival naphtha coming to their countries.

So, another thing that I want to point out is that a lot of the crackers operators were contemplating not just on cutting the rates. They are looking to issue FM and potentially shut down, too. So, it's really causing quite a big impact in the Asia market. So, on 3rd March, we also have Chandra Asri, Indonesia's cracker operator, issued an FM to its downstream takers, citing that they are fearing that there won't be enough of polymers given to them.

Moving forward, I would say that if these situations don't ease for...I mean, if this situation prolong for a while, some of the inventories or some of the naphtha crackers in Southeast Asia or even in Korea might not be able to sustain so long. They have no choice but to shut down.

But Japan is another story. So, Japan is really quite special in this case because, first things first, they have their own refinery. And secondly, what I know is that their import of naphtha could be very minimal. And thirdly, they are embracing themselves for a very heavy turnaround. It's a scheduled turnaround 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 of plants yet, but of course, rates cuts are inevitable. This thing is something that we have to monitor.

Erol: 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, TS. How comfortable should the market be with the amount of steam cracker capacity scheduled for 2026, given that margins are so weak at the moment and have been weak all throughout 2025? Can we expect these margins to recover anytime soon?

TS: 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 will only take place in 2029 to 2030. Yeah. So, 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 weigh on these ethylene margins as well. So, moving forward, as long as China is 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.

Erol: Okay. Thank you, TS. That's all that we have for you today. Thank you to both Jide and TS 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-products@argusmedia.com. Thank you very much.

Jide: Thank you.