SIMON SAYS: Forget about the V shapes, it’s more a question of going full circle!

Submitted by Simon Hill on Sun, 07/05/2020 - 17:00
Forget about the V shapes, it’s more a question of going full circle!

Talking of circles, I was intrigued about this oil tanker called “Willowy”. The ship’s officers were called to the bridge to be told their ship, and four others close-by, were sailing in circles, unable to use their steering, and potentially close to a collision, but why was this happening? The ships were in the South Atlantic off South Africa, an area notorious for strong currents, but not where the four ships were located. And this wasn’t the first such incident reported, previously it had occurred close to a Chinese oil facility, as well as in the Straits of Hormuz. Now, the conspiracy theorists amongst you will be pointing your finger at foreign powers, potentially undermining the AIS tracking system, especially at a time when governments are seeking to find the oil sanction busters, especially as all commercial ships are required to use AIS under international law, and therefore you may well have a point. But the European Space Agency has detected something else. They believe the Earth has lost almost 10% of its magnetic strength, albeit over the last 200 years! And the area where it’s very weak, you guessed it, just where the “Willowy” was circling.  As the energy markets try to come full circle, back to where they were before all this horrible coronavirus, the question has become what will ultimately drive it, the actions of governments or the direct consequence of powers outside our control?

We saw oil prices hit four-month highs this week, before easing off as bearish emotions took hold. It was starting to feel as if the world was coming full circle, that $50/ Bbl crude oil was in reach, and all that would ultimately mean for production forecasts, that had dropped off the cliff only a few months earlier. Players have pointed to a tightening market as demand continues to recover, and there’s been a surprisingly good jobs number come out in the U.S. this week, but more importantly, there is an awful lot of money being circulated in the markets by governments the world over, and this money tends not to end up with a small company trying to re-open their factory or business, it ends up buying convertible assets, paper replicas of the real thing. Not unsurprisingly the oil market is one such sector with a real physical, and a not so real paper market. It sucks money in from all sources, and today’s levels could well be influenced by the huge government injections designed to float around the money markets, adding that much need buoyancy.

So, should we be thinking it’s time to dust-off all the LPG trading “rule” notes, and believe the market has come full-circle. Certainly one area that has come back in vogue is the petrochemical sector, as the propane relationship with naphtha moves into heavy discount, topping $100/ Mt in NW Europe on the prompt month, and $80s/ Mt for August. It feels normal again compared to the days, not more than a couple of months ago, when LPG prices were more than $100/ Mt higher than naphtha. In Asia butane is now the favoured feedstock for the Korean petchem users, with one buyer grabbing a full split cargo for early August delivery, and also the same party couldn’t resist issuing a purchase tender for half cargo butane parcels for the balance of the year, and maybe even into February 2021.

On the supply side the OPEC+ contingent are scheduling to ease the recent severe production cuts. Russia are looking for a partial restoration of the volume reductions starting 1 August. Saudi Arabia and Kuwait have restarted production from the Neutral Zone, albeit not a source of LPG, but it’s a sign of the big players being prepared to start turning the tap on, however gradually. And this can only mean one thing for LPG, more export cargoes will surely become available.

On the U.S. side there’s a paradox emerging. Some confidence is being brought back to both the shale and refining sectors, but there’s a long way to go, and the news of the demise of Chesapeake on the shale side still sends shivers down the spines of producers desperately trying to find any source of financing. But the green shoots are starting to become visible. In the refining sector, U.S. gasoline demand plunged by about 7 MM Bbls/d between March and April, but it’s now back-up by more than 4 MM Bbls/d, as millions have returned to driving. Okay, the inventory for motor gasoline is high, the wave of global “mega” refineries, according to Goldman Sachs, will further squeeze margins in the months and years to come, and jet fuel demand is still in the doldrums, but refiners are getting back to higher operating levels, reportedly up to 75% of capacity. This is good news, not only for the supply of LPGs worldwide, but also for the flow of crude oil, away from storages and into real consumption, helping improve U.S. shale crude output levels. Put simply, we should be seeing better production numbers for both propane and butane in the U.S., and over time that should ease the price of propane down, hopefully widening the ARB, and increasing exports.

Some may say the more positive news is already there, with production levels holding above 2 MM Bbls/d, and inventory numbers building a levels well above market expectations. The Mont Belvieu FOB resale market has certainly edged away from further cancellation rumours, as the bid/ offer range pushes up a notch or two to the mid-single digits.

But, the U.S. is still struggling to cope with coronavirus, and over 50,000 new cases a day, increasing potentially to maybe double that number in the weeks to come, may well put all of the optimism on hold, despite President Trump’s words of optimistic wisdom. Without the U.S. functioning it’s hard to see markets coming full circle for a long time to come. I also have my doubts about what is really happening in China, and its impact on LPG demand. We saw the expected bounce-back in May when imports exceeded 2 Million Mt, up 20% on April’s numbers, but June is not so encouraging as players see a potential 25% drop-off, as high domestic inventory goes hand-in-hand with slower than expected consumption. Again we thought China was about to come full circle, it clearly isn’t there yet. We are seeing demand improvements in India, but again there’s a long way to go until the country meets the consumption levels seen at the beginning of the year, and the recent surge in coronavirus cases isn’t going to help. Spot demand into Indonesia continues, but their shortage of contractual volumes, doesn’t really tell us too much about any demand changes.

So, we shouldn’t get carried away with ourselves, it’s still only July, and with coronavirus, or not, demand is usually as dull as dishwater at this time of the year. Traders might not be spending their summers in splendid villas far away from home, but with pubs just re-opening here in the U.K., also don’t expect them to be sat at home, slaves to the screens, just leave that to my three boys, who’ve just started their official summer holidays, although it feels as if they started them more than three months ago!

Oh yes, back to those ships circling a little out of control. It might not be time for a surge in VLGC freight levels on the back of AIS system breakdowns, linked to magnetic fields and subversive activities, but with production optimism comes greater vessel usage, and that surely can mean only one thing, higher rates. Beware!