SIMON SAYS: Here today, gone tomorrow!

Submitted by Simon Hill on Sun, 06/21/2020 - 17:00
Here today, gone tomorrow!

Who would have believed it, only two months ago the price of WTI went negative, although mainly driven as a reaction to a closing date on a monthly futures contract, but it was signifying utter turmoil in the oil sector, where demand had collapsed, OPEC had buckled, and any oil related orifice available was being used to store excess barrels of crude oil. The pandemic wave of coronavirus had engulfed the western world like nothing had done before it. “V” shapes became elongated “ticks” as economists scrambled to make sense of the ever changing data and unpredictable future. I’m sure I used the word Armageddon more than once in the SIMON SAYS blogs at the time. But with all the economic gloom and doom that has followed the descending COVID-19 numbers, we amazingly saw the price of WTI crude oil nudge into the $40s/ Bbl on Friday morning, before settling slightly below the benchmark. May be I should change the headline to “here today, gone yesterday”!

But the theme today is not directly related to the tick-up in the WTI curve, although we all know the significant influence of crude oil pricing on the world of LPG, it’s more looking back at what’s become of the LPG shipping market, especially the VLGC trade. For certain we’ve reached the “tomorrow” phase!

The first thing to remember before we get into the nitty gritty, is that the VLGC shipping malaise is ultimately demand driven, yes, on the micro level that means the actual demand for ships, but it’s more the macro demand for LPG visible or not in the world today. The pointers are nearly all on the negative side of the equation. Asian storages are chock-a-block, summer demand in the Northern hemisphere has been taking its toll, petrochemical feedstock buying has been hit by the worldwide economic reality, but also by the slump in naphtha prices, recently recovering along with crude oil, but not yet enough to do more than just tempt feedstock buyers to look at LPG. They’re the obvious ones to spot, but the underlying currents of recessionary gloom will dampen any thoughts of a recovery in LPG demand, even as we approach the pre-winter buying season. So, for me this is all driven by demand reality and fear, and that’s all to do with the impact of coronavirus, but with trade issues still bubbling in the background, there’s no easy path to navigate. Remember the U.S./ China trade war and that craze called Brexit?

Demand destruction, and its aftermath, has led to a harsh and discordant reality for the ship owner, where producers are being forced to cut production and therefore export supply, and this time pretty much across the board! In a relatively tranquil week for the LPG market, eyes were focused on July’s Saudi Aramco nomination acceptances, or more apt would be non-acceptances! If we use the rule of thumb that there are circa 15 VLGC loadings out of Ras Tanura and Yanbu in normal times, then in July we will be lucky to see half that number. As synonymous as “gin and tonic” or “Ben & Jerry” , is the “now” contractual terminology, “cancellation and deferment”, and the ship owners quiver every time they hear it, something they thought had temporarily disappeared from the English language, at least during 2019.

Although we keep talking weekly about cancellation rumours out of the U.S. Gulf coast, it’s hard to gauge the true figure, however one thing is for certain there are less cargoes being exported. May be I should replace the word certain with EIA numbers, as propane exports dropped nearly 350 M Bbls/d to circa 750 M Bbls/d, less than half of what I would have been expecting at the end of last year for mid-summer 2020. However much the ship owners take their economic lives into their own hands, the cargo supply has just evaporated on them. But don’t forget the ARB in all of this.

The relationship between WTI and Brent has seen the delta narrow considerably from this time two months ago. A differential of $2/ Bbl is not going to encourage bulging ARBs, and again that’s not good news for the ship owner. In very simple terms Brent leads the way on FEI values in Asia, it underpins whatever micro LPG event is grabbing buyers and sellers attention at the time. In relative terms the improvement in FEI has not matched the advances in Mont Belvieu, and that only points to a narrowing of the ARB, a squeeze on ship owners facing open positions, and potential long waiting times. The bid / offer talk in the U.S. still appears to be in that 4-5 cent/ gallon range, hovering on the cancellation edge, if not already over it for some, but it’s not creating more cargo opportunities, and it’s becoming clearer that contractual export volumes may not even be as high as the levels I suggested only recently.

We therefore have this extremely unusual situation of having the two main export areas reducing the number of cargoes at the same time. Yes, there are spot liftings, but these are only cargoes that can’t be absorbed in systems or sold quickly, they aren’t extra. But as with all markets, there will be change, and maybe we are seeing the possibility of parking VLGCs, with cargo on-board, in anticipation, maybe even expectation, of higher prices. The forward paper market is in contango up to the end of the year, and although the levels are short of double digits between months, the “park” option is becoming more and more workable as freight levels subside. With the ship owner unable to employ the slight deception of heading west if the east is weak, and vice versa, nor able to benefit from slow steaming, as the destination may or may not be the right choice, sat waiting is becoming the option. With the small number of physical cargoes that are available on a prompt basis having to be sold at lower levels, this is also giving the trader at least the possibility of sitting ships and cargo, as the physical delta appears to be wider than on paper.

With so little export volumes around it may well prove to be a winner, especially if LPG demand starts to pick up, particularly for the winter, but will it really benefit the ship owner, maybe not. However, it could bring some relief from the current slide, as ship owners wait, and prey, for the recovery in crude oil prices to march on up to the $50/ Bbl level. Then we will start to see production resume and exports increase. But as with coronavirus lockdown easing, let’s not get too far ahead of ourselves, as there’s always potentially a nasty bite to come!