European naphtha market participants are increasingly pricing in the risk of disruptions in the Bab el-Mandeb strait, although market participants said the Yemen-based Houthi militant group's threat to Saudi shipping is yet to result in meaningful changes to physical cargo flows.
The east-west naphtha swap spread was $72.75/t on 21 July, wider by $18/t on the day and by $30/t on the week, with heightened concern about supply to destinations east of Suez.
The possibility of Red Sea disruption comes as Russian naphtha exports are in decline and Chinese buying interest shows signs of improvement. Naphtha exports through Bab el-Mandeb averaged around 388,000t/month in the past two months, roughly double the 2025 monthly average.
A trader active in west-to-east naphtha arbitrage trade told Argus that at least one cargo was recently fixed from Europe to Asia via the Suez Canal, providing an early test of shipowners' willingness to continue using the route. The trader said some owners have suspended Red Sea transits, and others are waiting to see how the Houthis will enforce any restrictions.
The group has said it will only target vessels carrying Saudi cargo, or that have left or are heading to Saudi ports.
The uncertainty has started to affect trading behaviour. A European naphtha broker said liquidity is weakening, with market participants becoming cautious about committing supply until the implications for Asian buying requirements become clearer.
"Traders will buy and sell less volume as the market becomes more volatile," the broker said. "There will be less liquidity in the market overall."
An Asia-based light-ends analyst said balances "are gradually tightening", with supply risks outweighing concerns about demand.
Cargoes can be rerouted around the Cape of Good Hope if the Red Sea situation worsens. But doing so would substantially increase freight costs and voyage times, raising the cost of supplying Asia-Pacific buyers. Argus estimates sending a Long Range 2 (LR2) tanker from the Mediterranean to Japan around south Africa would add around 19 days to the journey and nearly $600,000 to the fuel bill at current prices.
Market participants said the naphtha east-west spread may need to widen significantly further before long-haul Cape routing becomes routinely economic. The light-ends analyst estimated the spread may need to approach $80/t, depending on freight costs.
Russian exports are likely to fall because of refinery disruptions, while restrictions on gasoline exports could divert additional naphtha into domestic blending, limiting global availability.
