SIMON SAYS: Are the VLGC owners about to lose control?

Submitted by Simon Hill on Sun, 03/08/2020 - 13:59
Are the VLGC owners about to lose control?

As the freight rate for the standard Houston to Chiba voyage drops into the nineties, it’s maybe time for the VLGC owners, and disponent owners alike, to buckle-up tightly as things are about to get a little more bumpy in the LPG shipping market! But it’s not time for despair, there is light at the end of the tunnel, albeit probably not until the latter part of the year. Therefore ship owners need to react, sooner rather than later, or they could easily be left again at the back of the queue.

I know what you’re all saying, this guy keeps banging on about how strong the shipping market was going to get, and now it’s got up there he’s starting to change his tune. I think the signs around this time last year were pretty clear to everyone, but as day follows night, so do highs get followed by lows, markets change but the question is always whether the change will last?

You also know that I’ve been harping on about the delay in LPG export expansion, especially for propane out of the U.S. Gulf Coast, and above all from the world’s largest  LPG exporter. But the major impact on the VLGC market has been taking place in the Middle East. As OPEC’s meeting in Vienna, Austria came to an end, the broader alliance of OPEC and non-OPEC producers had to ratify a proposal to impose additional production cuts of 1.5 million Bbls/ day from the beginning of next month until the end of the year. Two-thirds of the cut would have been borne by OPEC members, with the core producers such as Saudi Arabia taking up most of the decrease, but the other third, clearly led by Russia, needed to say yes. They didn’t, citing concern over North American shale producers gaining the most out of any deal. So the breakdown of negotiations led to the collapse of the oil price by 10 % at the Friday close. What next? Clearly the politics have taken over, but so have suggestions that a “free-for-all” may be started by member states, both OPEC and OPEC+, in order to grab market share. We’ll need at least a week or two to work out what’s really going to happen next!

In the meantime I’m expecting Saudi Arabia and its OPEC allies in the Middle East to keep-on enforcing cuts that are directly impacting on the supplies of exportable LPGs. We’ve seen the cancellations and delays become monthly occurrences at the time of nomination acceptances. Again this week Qatar confirmed two-week delays in its April LPG lifting programme. I have a sneaky feeling Friday’s Vienna Armageddon will ultimately make matters worse, even if the taps are opened in the short term.

We all know that the current concerns of the oil cartels are centered on the spread of the corona virus worldwide, and its impact on oil demand. According to the FT, the likes of Vitol, Trafigura and Gunvor are all seeing oil demand flatlining, maybe even shrinking, resulting in the weakest levels of oil demand growth since the financial crisis. Without doubt the full impact of the virus on demand is still unknown, as the effects are still to filter through the economic systems, but with a cut in demand of one-third at the height of the isolation period in China, you can see why players in the market are worried. We expect that the virus will peak by Spring and then normalize, but the worries are hitting demand and forcing oil producers to take swift action to try to maintain prices. In addition we have the impact on LPG exports caused by the U.S. sanctions on Iran, with sketchy reporting pointing to reduced month-on-month figures nearing 50% of exports seen out of Iran at the same time last year.

These cutbacks have started to hit the ship owners hard, with rates from Ras Tanura to Chiba dropping from levels in the $80s/ Mt in mid-January to below $60/ mt today. Although China alerted the World Health Organisation at the end of last year of a number of unusual pneumonia cases in Wuhan, that a week later was identified as a new virus, the shipping market at the same time was enjoying strong rates, as IMO 2020 bunker fuel changes came about, together with the combination of an increase in dry-docks for scrubber fitment to a proportion of the VLGC fleet, fog along the Houston Ship Channel, delays transiting the Panama Canal due to water level constraints, and the continued drag of the U.S./ China trade war talks, all adding to a buoyant market. Today most ship-owners have fitted their scrubbers, and even the worry that the 2015 VLGC delivery boom would mean more ships having to go through delays in dry-dock has been somewhat offset by requests to move inspections back a couple of years being met with “class” approval. It’s also the time of year where the impact of fog starts to recede, although never say never. Panama is still an issue, but there is certainly positive news on the U.S./ China tariff front, with up to 12 Chinese importers receiving approval from the Chinese authorities to import LPG from U.S. sources.

One piece of good news for the ship owner versus 9 months ago is that we have 15 new VLGCs due for delivery in 2020, with 6 slipping back into 2021, yes that’s good news. However, whereas we had only 2/3 new buildings in 2021 I now have 15, and for 2022 another 6. I still think we will see more new  ships built as the economic viability of the older VLGCs become more visible in the market, but that’s for another day. It’s the upcoming 3-6 months that will be significant for the ship owners. And at the end of the day the deciding factor is going to be whether we will see incremental slots out of the U.S., as simple as that!

Last week’s U.S. industry gathering in San Diego certainly raised the issues surrounding the future growth in NGL production from the shale regions. The debate is definitely on the bearish side for production growth rates, and even ExxonMobil are being cautious with their future drilling dollars in the Permian Basin. In addition the demand uncertainty in the world economy, feeding through to oil and gas prices, is also providing a bearish tone. We still keep a close eye on the weekly propane production numbers, and although there have been refinery turnarounds and only a marginal increase in new fractionation capacity, the market expectation has been for higher production rates, but after a jump at the end of 2019, especially in the U.S. Gulf Coast, these numbers have dripped away. However the market expects the second half of 2020 to bring fractionation capacity on stream, increasing exportable volumes. There still appears to be excess quantities of Y-grade, and this is likely to continue to show up in weekly stock numbers waiting for the new fractionators to get into action. But the problem is still going to be getting the product out - Exports!

The second phase of the Enterprise export expansion programme is due to take place in the third quarter of 2020, adding 260 M Bbls/d of LPG loading capacity. If I was a ship owner I’d be hoping these expansions are completed on time!