SIMON SAYS: Bubble Sustainability?

Submitted by Simon Hill on Sun, 06/14/2020 - 17:00
Bubble Sustainability?

The LPG market takes pointers from a number of direct and indirect sources, not least the crude oil and overall energy scene, but also the global array of economic data and indicators. The last few months have been no different, especially as we emerge from what’s been the biggest shock to both our lives and to the world’s economy, probably in living memory. And then there’s the correlation between what we think will take place versus what is actually happening, in LPG terms, between gazing into the forward market crystal ball, against the rolling reality of physical transactions. Where prices overlap there is an expectation of a link, one may be ahead or behind the other, but there is a connection. The problem has been that this link has become ever more shaky in recent weeks, and by Wednesday the pin had been firmly pushed into, what can only be described as, a mini-bubble!

I’m sure I’m not the only one who has been surprised by the recent buoyancy, if not bullishness, of the major gauges in the global world of commerce, and specifically the energy market. On 23rd March this year,  the Dow Jones Industrial Index had slumped to around 18,500 points, but in just 10 weeks it had rebounded all the way up to above 27,000 points. Similarly on 21st April the Brent crude oil price had dipped below $20/ Bbl, yet in only 7 weeks it was pushing up and beyond the $43/ Bbl mark. The wildly contango forward crude oil markets, we’d seen around Easter, were starting to come true as the physical front of the curve caught up fast. The world of LPG pretty much followed suit, albeit for a few kinks along the way, especially with the initial bolt for cargoes by the Indian importers. Okay, we were not back at the pre-coronavirus levels, but the market appeared to be showing more optimism than maybe realism. And then came the warning from the World Health Organisation, that not only were we seeing an increasing trend in the number of new cases, especially in the Americas and Africa, but the risk of a second wave, especially in those countries that had already passed their peaks, was real. Add in all the other fact and rumour mongering that goes on, the result is what happened to the markets this week, with 7% being wiped off the Dow Jones, and the Brent crude oil price retreating to below $39/ Bbl by the end of the week. The bubble might not have fully burst, but the markets are showing they need to heed the warnings, and adhere to a more cautious approach. Exactly what we are seeing in LPG.

The LPG world pretty much revolves around Middle East supplies, Asian demand and what has become an increasingly larger “margin” play, U.S. exports! Although some may say there is a tenuous link between all three, the move to U.S. supplies is clearly driven, in both the short and medium term, by both the level of CP pricing, its impact on FEI, as well as the vagaries of the monthly volumes of export cargoes from the Middle East, especially Saudi Arabia. But we have continued to see the ARB market, especially the one between the U.S. and Asia, failing to show real direction and appearing to pretty much sit on the fence, waiting for someone else to give it a nudge.

Now I fully appreciate that the exceptionally large cut-backs in Middle Eastern production and exports, has meant that U.S. lifters are more reluctant to simply cancel cargoes purely from a price perspective. But it’s starting to play havoc with the market realignment mechanism so neatly provided to us by the ARB, and the ability to cancel export cargoes if the numbers are not making sense. I think the somewhat misguided optimism of the economic and energy markets has played its role too!

There appears to be a game of cat and mouse going on, with the cat in the disguise of the shipping fraternity, appearing to chase down the freight market in an attempt to make the ARB work physically and get their open ships fixed. Long gone are the heady days of $1.5 million plus monthly time charter equivalents, let alone even $1 million. If you get $500,000 you’ve done well. The pendulum has completely swung away from charterers trying to fix any open ship, even up to 45 days in advance. Instead we are seeing the fixing window move ahead of open VLGCs, most having already arrived at their anchorage point, close to the U.S. Gulf loading ports. Normally ship owners are deciding whether to turn left or right after leaving Asian discharge ports, with both supply markets at depressing levels, it’s a decision that’s been taken out of their hands.

The optimism in the oil market was starting to bring some degree of relief to the ship owners, as they kept up to date with the raw weekly rig count details, hoping the tally would suggest a more optimistic drilling scenario, feeding through to higher production and exports. But as I said last week, this is not going to happen at $40/ Bbl crude oil, LPG exports will decline from the volumes of last year unless we see a constant $50/ bbl level, and with more than a dozen new VLGCs in the market already this year, together with the severity of OPEC cutbacks, it may be time to put more ships on longer voyages, miss out on Panama, or sit it out. I suspect Pertamina’s foray into the U.S. Gulf FOB market this week was as much to keep their vessel employed as it was to find scarce split cargoes. There might be cutbacks in the Middle East, but the sellers are easier to find than the buyers.

So, we keep reaching this situation where the ARB just doesn’t seem to strike on one side of the fence or the other. How long have we been saying the net-backs are around 4 cents per gallon, but the market seems unable to inspire buyers and sellers to step up to the mark, or ship owners and trader re-lets to drop their rates quickly enough to move three or four ships in one go, in the fear they will miss out on any instantaneous recovery. BW Gas did it with the purchase of 3 to 4 cargoes a few weeks ago, and by my maths probably locked in a freight beginning with a 6, leaving those ships to today’s market would only just secure a very low 5. But it takes all sorts to make a market, and luckily we have that diversity of thought and direction in LPG to usually make the market move. The problem for me is that it just doesn’t feel as if it is currently there.

I think the fear that we are going to struggle for longer to find a recovery in demand levels, however quickly we, in Europe and the U.S., start to believe the coronavirus has peaked and left, is ultimately driving the market. The backdrop scenario in Asia appears to be dominated by full storages and the lack of hardly any prompt demand. Even a Formosa tender is not the nirvana sellers were hoping for. The contango curve that was flattening-out in the oil markets, until last Wednesday, has now reappeared in the LPG world. There’s still a long way to go until the light at the end of the tunnel!

Finally I just wanted to comment on the passing this week of the former Vitol CEO Ian Taylor. He was such a significant figure in the growth of the commodity trading business, and although he held an alternative view about the direction of LPG trading within Vitol, their success and growth in recent years is as much the result of the company he built around him as anything else. We only met a couple of times, but I remember sending him an email out of the blue, in response to a friends question regarding the purchase of some downstream assets in Africa. He replied within 5 minutes, he had his #1 acquisition guy call me, and a meeting was set up within 24 hours. He made things happen!