William Shakespeare famously wrote, “All the world’s a stage, and all the men and women merely players”. It’s something that grabbed my thoughts as I wandered the Mayfair streets from meeting to meeting last week, at a somewhat abbreviated Institute of Petroleum gathering in London. A lot of the big parties had been cancelled, many players had decided to stay at home or leave earlier than normal. It definitely struck me, as individuals in the LPG industry, that we were “merely players”, and the world was starting to act-out a scene that might take us somewhere we haven’t been before. The complexity of the coronavirus outbreak is severe enough by itself, but the knock-on impact it could have on world economic supply and demand numbers is causing grave concern, some may say it’s an over-reaction, but no individual can claim they know the likely outcome any better, or any worse, than the man or woman walking the opposite way around Grosvenor Street last week.
The LPG market appears to be in a degree of conflict, as it tries to gather itself for making more buy, sell and hold decisions in the coming days. The nature of the LPG market has traditionally been “supply” driven, where generally LPG production comes about as a result of other energy investment decisions being made first, and the selling bit comes second. As I look at the supply side of the equation I feel more than a touch of supply contraction bearing down on the market. I appreciate that there’s been fog along the Houston Ship Channel disrupting loadings, and deflating the weekly EIA propane export numbers, but since the export blip 4 weeks into the new year, we’ve seen propane exports drop to barely more than 1,100 M Bbls/d. With all the announcements in the U.S. about better takeaway, new fractionators coming on-stream, coupled with a significant expansion in export capacity by the end of last year, you would be expecting 1,400 to 1,500 M Bbls/d becoming the norm. Yes, there are VLGCs waiting outside Houston, but more of them are waiting to find cargo stems than taking their turn to load delayed liftings.
If we then skip over to the other part of the world, that together with the U.S. accounts for over 80% of VLGC loadings, we continue to hear of further OPEC reductions likely to be discussed in this week’s OPEC meeting, in reaction to coronavirus led demand fears, and in addition to the cutbacks we have already seen forcing cargo cancellations, and nomination delays from the Middle East loading terminals in March.
Clearly I’m concerned that the LPG market is going through a contraction in supply, with OPEC induced reductions in the Middle East, not being offset by enough growth in exports out of the U.S., and this is not an issue I have with domestic NGL production levels, although it is a longer term concern that will need to be addressed. Whatever your view, the shipping market normally confirms the true story, and it is certainly doing that now. After robust levels over the past year, we are seeing, for the first time since the end of May 2019, freight numbers from Houston to Chiba starting to test the $100/ Mt level, already a drop of more than 30% in just over a month. The ship owners, although concerned, are buoyed to some extent by the weakness of bunkers, below $500/ Mt for Marine Gas Oil (MGO) in Houston, and even lower out of Singapore. But the main anxiety for ship owners still revolves around supply concerns, whatever the likely impact of the coronavirus contagion turns out to be.
One worry for ship owners and traders alike, is the continued delays we are seeing in and around the Panama Canal. The area has seen an extended period of low rainfall, resulting in historically low water levels in the Gatun Lake, the main source of water for the Panama Canal. Last year’s rainfall was down by 20%, and is the fifth driest year in the last 70 years, already following several years of below average rainfall. This is made worst by higher air temperatures, up by as high as 1.5 Degrees Celsius, increasing the rates of water evaporation. The response has been the implementation of new freshwater conservation surcharges on February 15th, together with adjustments to the booking system, reducing the daily reservation slots available to 27, the same number as during lane outages. This has accentuated transit costs, especially with the current waiting times. There are hefty delays for both pre-booked and non- pre-booked vessels, with reports of up to 8-10 days for pre-booked and as high as two weeks for those that haven’t booked ahead, especially through the old locks. Previously it was taking 2-3 days to transit the Canal, depending on seasonality and water levels. There doesn’t seem too much light at the end of the tunnel either, with the pre-booking system fully committed through to mid-March. It’s starting to sound a little bit like getting a table at The Hut restaurant, sorry I had to get that in!
Potentially a delay around the Panama Canal of 10 days at current cost levels for a VLGC of at least $50,000 per day, is the equivalent of $10/ Mt for somebody’s account. As normal butane economics out of the U.S. start to work, we could well see more vessels heading via the Cape of Good Hope, with better options into Indonesia and India, and dare I say it, even China. This is especially the case if bunker prices remain comparatively low and OPEC decide further cutbacks.
So, supply is looking tight, certainly for the bulk of the first half of the year, and although shipping should start to suffer as a result, there will be potential delays and longer voyage times to keep the market from slipping too far away. But, what about the ARB, I can’t remember it taking me 1000 words (987 to be precise) to mention it. It’s still there, in as much as it is open, but it’s narrowing, and the curve is flattening with no more than a $10 drop between May this year and the end of 2021. It suggests to me a forward curve that will support a 6-7 cents/ gallon re-sale value FOB Houston. This level could increase on the back of two factors. Firstly the freight levels do not hold, with less cargo availability forcing down freight rates and pushing traders (and Owners) to bid up FOB supplies to keep their ships running. Secondly, let’s not forget the biggest LPG market in the world, where we are about to enter the “build season” some 20 million plus barrels ahead of last year, and the highest level ever. There is concern about production, but not fears of an overall decline, more of a reduction in growth. But a similar concern surrounds domestic demand projections in the traditional propane sector, as well as the limited switching flexibility of the newer U.S. olefin crackers. So don’t be surprised to see U.S. LPG production levels continue to increase in 2020, and if export capacity is already at a current peak, then the ARB could well widen, whatever the demand situation is in Asia, during or post coronavirus. Without increased export capacity capability it’s hard to see cargoes getting sucked out of the U.S. market by terminal fees moving higher. But maybe we might hear the rumours of a new export terminal resonate again, we’ve just seen an offshore crude loading terminal announced in Corpus Christi, Texas, so why not.
By the way I understand there was a production of Twelfth Night by Shakespeare at the Harbor Theatre in Corpus Christi recently, maybe the Bard will have the final say!