A bit of momentum has returned to both crude and products. Of particular interest is the strength in naphtha prices — which had suffered the greatest fall in the big commodities sell-off of Q4 2008. The gasoline/naphtha (regrade) spread has narrowed to +30/mt versus a high of +120/mt last year. Front month WTI, meanwhile, was trading at $47.19 per barrel, with Brent (an increasingly better indicator because of Cushing storage issues - see this FT Alphaville story) at $50.36 per barrel.
Products, meanwhile, are slightly stronger too. Notably gasoline (RBOB) has started the year back in positive territory - even if just. Note the following numbers from Petromatrix as of close of business Friday (although the RBOB crack was faring even better at +0.70 cents at the last look) :
The revival of crack spreads in particular is a positive signal for the crude markets as well as refineries across the board. These had seriously come under pressure end of last year as negative spreads in both gasoline and naphtha made turning a profit increasingly difficult. As Stephen Schork points out the benchmark NYMEX gasoline crack traded negative in 53 out of 64 (83%) sessions in the fourth quarter.
But it appears it may be too late for some refineries. The world’s third-largest petrochemicals company LyondellBasell looks — as of today — increasingly likely to file for Chapter 11 bankruptcy in the US according to analysts. This is after the company failed to renegotiate terms on $26 bn of debt by a January 4th deadline. The private Netherlands-based firm’s bonds were trading at 4 per cent of face value on Monday. As Reuters writes:
Analysts at independent research firm Credit Sights said a Chapter 11 filing was the most likely outcome for the company, which employs 17,000 people and had combined pro-forma annual revenues of $44.7 billion in 2007.
“The company has no near-term debt maturities, but the amount of debt that LyondellBasell has is unsustainable under current conditions, and the options available are minimal,” Credit Sights analysts Andrew Brady and Wen Li said in a note published on Monday.
Asset sales, such as the possible disposal of its Houston refinery, would be time-consuming and are unlikely to realise full value in the current economic climate. An out-of-court restructuring, though favourable from a cost perspective, would also be complex given the company’s liquidity profile and needs timely agreement from all stakeholders, the analysts added. The company’s liquidity profile has deteriorated rapidly to $639 million from $1.67 billion at the end of the third quarter, which is less than the quarterly cash requirements for interest expenses and maintenance capex, Credit Sights analysts said.
The position was made worse by a denial from parent company Access Industries for a $750 million credit facility, and LyondellBasell was also renegotiating $281 million in fee and interest payments with its creditor banks, they added.
Petromatrix’s Olivier Jakob points out Lyondell is not the only refinery to have proven unable to operate in an environment of poor margins, low flat price and risk-adverse credit lines:
Flying J and its 100 mbpd of refinery capacity filed for Chapter 11 on Dec 22nd and on the same day major rating agencies put Alon refineries (255 mbpd) on Credit watch with negative implications. The US refining capacity at risk of bankruptcy is starting to add up to a significant amount. Furthermore, on Wednesday Valero stated that is was keeping its FCC’s in St Charles and Corpus Christi down “indefinitely” (combined 120 mbpd).
Back to the numbers, however — a recovery in crack spreads should suggest the elusive bottom may very well have been reached in crude on the back of the market finding a new price equilibrium for the current greatly reduced demand for gasoline and naphtha in particular.
Of course there are other bullish fundamentals out there too like cold weather, Russian Ukraine gas disputes and the renewed conflict in the Gaza strip. Another source of potential volatility over the coming days will also likely be the index rollovers according to Petromatrix, these include GSCI (Goldman Sachs Commodities Index), which starts to roll Thursday over two days, and more importantly the US Oil Fund ETF (USO) which starts Tuesday. USO is a particular concern because it usually rolls in only one day. But as Petromatrix explains:
The size of investment in the ETF has recently grown to such a high level that it will need to roll in one day more than the GSCI in two days; and we do not think that the managers of the USO have the practical experience of rolling such a large position. Given the high Cushing stocks, the USO roll tomorrow to be followed by the GSCI roll and 2009 rebalancing, we would favor having any WTI length on March rather than Feb.
In other words you can expect a potentially large spike in the March contract in the next few days - long live the contango!
Related links:
Redefining refining - FT Alphaville
It’s all about Cushing - FT Alphaville
Downgrading the UK’s largest private company - FT Alphaville
Has crude bottomed? - FT Alphaville
