SIMON SAYS: A World of Contradictions!

Submitted by Simon Hill on Sun, 05/31/2020 - 17:00
A World of Contradictions!

The market, and the world itself, have had a strange week. Even after half a year of the coronavirus, when the world rapidly became very abnormal indeed, we suddenly have events happening that were very difficult to foresee. Now I’m not going to spend too long talking about the trader’s DNA, yes vision. If you’ve been following the U.K. news in the last week , having the ability to “see” has grabbed the attention of most of the media, some of the public, plus an awful lot of paid and unpaid satirists. If you haven’t been subjected to this charade, it’s basically an adviser to the Prime Minister, some would say more powerful than Boris himself, appearing to break the laws of lockdown, and having to come up with a cock and bull story to back-up why he drove 261 miles away from his home. Now, rules are set usually to fit the bigger part of the population bell curve, but sadly Mr Cummings didn’t want to correspond with the curve, and the vagaries of the LPG market, and the world that surrounds it, doesn’t seem to fit it either, not for this week anyway.

You might being asking what am I going on about, but in my 30 plus years in the business I haven’t come across such a number of unusual scenarios as we saw last week. For instance we have the largest OPEC production cutback I can remember, and this has resulted in half the number of LPG cargoes being exported from Saudi Arabia between April and May, with further cuts about to happen this month. Other Middle East producers followed, but if you ask any LPG players active in the region, they’ll tell you there’s in fact an oversupply of cargoes, which conflicts with any normal interpretation of the likely impact of crude oil production cuts on LPG supplies.

As a small aside, I did like the two conflicting reports that surfaced in the week, one claiming that Russia was seriously considering an extension to the OPEC+ production cuts beyond June , while the other said the opposite, that Russia would push for loosening the cuts!

Another illogical factor impacting the U.S. LPG market is the limpness of the ARB’s role as the invisible hand, where it is supposed to seek new equilibriums when the spread of prices leads to over or under supply market scenarios, in this case between U.S. exports and imports into Asia. If you throw in a lot of the secondary costs of moving LPG cargoes from Houston, via the Panama Ship Canal to Asia, the ARB has pretty much been shut for a few weeks now. Even if you ignore the costs, the numbers rarely seem to push above the 4 cents/ gallon netback level. Normally that’s a sign cancellations are going to come in thick and fast. But as we leave May, the June cancellations are thought to be zero, rumoured to be a couple, but realistically are no more than one. Again, this is not the normal interpretation of how the ARB is supposed to work. We are meant to see cancellations, Mont Belvieu stocks are therefore driven higher than expectation, and this pressures down the propane price in Mont Belvieu, easing open the ARB to allow exports to flow. Even though exports have increased last week in the EIA’s numbers, the rolling average is way down on last year, by over 10%. It could be argued that this is the influence of the ARB, but with contract loadings totally dominating the monthly lifting programmes, the only way to reduce the number of cargoes is to cancel. In next week’s SIMON SAYS I will try to throw more light on what the exporters are up to, as the world they face differs greatly to what they had expected only six months ago.

Although there will be elements of conjecture as to whether there really are cutbacks in the volume of exports out of the U.S. Gulf in May, and up-coming in June, the next apparent ambiguity surrounds the shipping market. With no cancellations from the U.S. in June, why is there a mini flotilla of unfixed LPG vessels, both owner tonnage and re-lets, waiting for cargoes to appear. Rates have tumbled by nearly 50% from the heights of only a couple of months ago, yes the eastern market has seen similar falls as supply cutbacks bite, there have been 15 VLGC newbuildings delivered in the first quarter of this year, and the drive to fix on a floating rate basis does take the bottom out of any market. But, there haven’t been cancellations, and when that happens we would normally expect to see freight rates at least holding, if not moving up. Instead the biggest buyer in the U.S. last week, and theoretically seller into the delivered market as well, was a ship owner, with BW Gas cleverly picking up three propane cargoes, hedging them in the paper market to lock-in a fixed freight level.

We also have the petrochemical market behaving in this very irregular manner, especially for anyone having only just spent a few years in the LPG business. We all caught-up quickly when the bottom fell out of the refining sector, naphtha dropped like a brick in relation to LPG, and anybody who could run naphtha backed out of LPG. In Europe and Asia the Propane/Naphtha spreads went positive, and we all thought the world had really reached Armageddon. Okay, they have started to correct themselves as demand destruction has improved to the status of serious demand weakness in the refinery product sector, while LPG is starting to have to carry the added burden of the summer doldrums, on top of the lockdown implications. However, the small negatives today in the Propane/ Naphtha spreads are nowhere near the negatives we need to see to make LPG of interest to the olefin crackers outside of the U.S., in Europe and Asia. The fickleness was again shown when petrochemical players in the NWE market were both buyers and sellers at the same time. The big question now facing the market is whether unsold LPG cargoes will have to find petrochemical buyers, and whether those buyers will actually be there.

At the end of the day the LPG market continues to buck its normal trend, where supply happens, and demand adjusts itself to follow. Whatever the supply numbers end-up being, given the influence of the OPEC cutbacks and the ARBs invisible hand, it’s still the demand side today calling the shots. The market is showing signs that whatever happens to the volumes of exported LPG, the market will be determined as being short or long, by the demand for LPG. So whatever your key indicators are suggesting, be it Pro/Naps, Baltic rates or ARBs, be prepared for more shocks along the way. Demand is coming back, but the question remains how far it will end up going. If we can encourage Mr Cummings to take a drive-out this afternoon, he can maybe give us that much needed vision!