Commodities may have had a disastrous run on Monday, but if you look at the energy complex in detail it wasn’t as bad as is being made out.
Firstly, the Brent contract as traded on ICE is staying firmly above the $40 per barrel mark, last quoted about $42.74.
WTI, as written about previously here, is tanking largely due to the Cushing issue. Accordingly, other crude grades in the US that trade as a differential to WTI are seeing their spreads strengthen too. As Reuters reported Mars and Light Louisiana Sweet both soared on Monday.
On the products side, gasoline - which was delivering consistently negative crack spreads through much of Q4 2008 - is back firmly in positive territory. Cracks in other products have also been strengthening. As Olivier Jakob at Petromatrix concurs:
Feb WTI continues into a Cushing free fall and the difficulty for OPEC is to manage the price of 30 myn barrels per day which are under the control of 30 myn barrels of stocks in the US Midwest. The extreme WTI prompt contango is providing the US refineries that are lucky enough to be WTI related with the best prompt processing margins since the end of the third quarter. The collapse of WTI is not followed to the same extent by Brent and this is making for a further extreme widening of the Brent premium to WTI. Since the US still needs to import Gasoline from Europe, the US Gasoline crack has to increase to compensate for the loosing value of US crude versus European crude. The March RBOB Gasoline crack has moved from -4 $/bbl at the end of November to +4 $/bbl.
As can be seen below the front-month crack is actually trading around the plus $9 mark today. Of course, that’s not to dispell the weakness, but strength in cracks is important as it incentivises refineries to process more crude. It also suggests the entire complex may have finally found a new equilibrium.
Related links:
It’s all about Cushing - FT Alphaville
The negative crack-spread - FT Alphaville
