He’s behind you…the evil banker

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Yes, a great story in The Daily Telegraph describes how bankers are being written into Christmas pantomimes in the UK as villains. Their reputation has fallen almost as low as that of marketing executives.

But the few bankers that are still around are still shamelessly peddling their wares, including hedging mechanisms for the poor old chemicals industry. The other route to wealth for monsters of leverage is buying plants from bankrupt companies and leasing them out to operators with sufficient cost control to meet whatever feeble demand remains over the next few years.

On naphtha, the more immediate problem is a seriously weird market. As of Friday last week, naphtha was trading $257.50-258.50/tonne CFR Japan for first-half January delivery, according to ICIS pricing.

West Texas Intermediate crude was meanwhile at $53.50/bbl, meaning a multiple of crude to naphtha of less than five times compared with the usual eight or nine times.

In the normal world you would expect refiners to make big run cuts in response to abysmal petrochemical demand for naphtha and the collapse in gasoline consumption. This would restore multiples close to their historic norm.

But as everyone knows, we are not living in a normal world.

The heating oil season, though, is beginning in the northern hemisphere, creating the risk that naphtha might increase.

Would it be wise to lock in cheap prices now through either hedging or stocking up on physical cargoes, just in case naphtha returns to its usual relationship with crude?

At some point, petrochemical demand has to improve, no matter how anaemic. In such an event, prices might literally double overnight from their historic low levels – meaning good returns for anyone who has locked in their feedstock costs.

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