SIMON SAYS: It’s not a week to be sure about anything!

Submitted by Simon Hill on Sun, 01/26/2020 - 17:00
It’s not a week to be sure about anything!

I used to get excited when the Gastech conference venue was about to be announced each year, the destinations were normally one of the big attractions for LPG players looking to get away from the dreary slog of the trading desk, Langan’s Brasserie or Cecconi’s for lunch, and Shepherd’s market for a few beers at night. You have to hand it to the pre-millennium traders for their dedication to the cause. Now Gastech is dominated by natural gas, and LPG went its own way with Purvin & Gertz, IHS and many more conferences.  Last week the “gathering” focus was centered on the Swiss ski resort of Davos for the World Economic Forum. Every influential person in the world of politics, business and peripheral influencers were there. So the energy market was bound to be impacted, directly or indirectly, by the discussions and announcements, made in front of the snowy backdrop, that is Davos.

The head of the EIA, Fatih Birol, was clearly pointing to the supply of crude oil exceeding demand, yes we’ve heard it many times before, but it’s starting to become the #1 tune. The EIA still believes that the production rates in Permian and Bakken are enough to at least offset poor performance in other parts of the shale oil patch. Crude oil production increases might sound relatively small when we say 25-30 M Bbls/d, but it is production growth, and it will still feed through to increased LPG production. Of course this negativity is offsetting the impact of production outages in the short term oil markets, for example in Libya, and the under-current of political tensions in the Middle East. So, although we are still seeing crude oil production growth in the U.S., the longer term demand concerns can only increase the downward pressure on crude oil prices and output, limiting further advances in LPG production growth.

What has hit me pretty hard over the last few months is how negative public opinion is gathering pace towards fossil fuels, and how the situation is changing at such a fast rate. It might not be fast enough for many, such as the David Attenborough’s or Greta Thunberg’s of this world, but for someone sat on the fossil fuel fence it certainly is. IMO 2020’s impact on the marine industry is the start, the drive of the big car companies such as Mercedes, BMW, Toyota and Fiat towards electric cars is bound to push numbers beyond the 1-2% of the market we’ve seen prior to 2020, just look at the share price of Tesla, and air travel is coming under greater scrutiny, with the significant reduction in air transport this weekend in China, due to the worrying out-break of coronavirus in Wuhan, impacting the front of the energy market. How this will ultimately impact on Chinese LPG demand as the Chinese New Year looks likely to be very subdued this year.

One area we’ve been trying to gain a more clearer insight relates to the U.S. / China trade deal news coming out of Davos, Beijing or even Washington, to give the LPG players a clue as to what is happening to LPG tariff levels for U.S. sourced product. We’re still waiting. In the meantime the easing of the fog restrictions in Houston has brought some relief to the market, but it does appear that players are not quite sure how big a reprieve this is. Yes, it means we are not heading for the LPG catastrophe of last year, not yet anyway, but also nobody seems ready to accept this is a bearish market either.

I always head back to the ARB, as it is the driver in a market where U.S. LPG exports are more and more the dominant force, albeit appreciating the history and politics of the Saudi Aramco CP price, but with OPEC absorbing the pinch in the crude oil market, and India a higher proportion of what LPG is exported out of the Middle East, I still feel the U.S. NGL market is the one to keep an eye on, and especially in relation to the ARB with Asia, and to a lesser extent with North West Europe.  I’m also seeing the clock ticking, as it tries to hang on to the longevity of the northern hemisphere winter, less plausible as we approach February, and potential April cargoes start to be increasingly talked. Asian buyers are getting hesitant, and it’s gradually starting to show in CFR prices, although the weakness of Brent crude oil does impact the direction Asian prices have being going. Yes the backwardation in the market is still evident, but it’s feeling less snug, and is pushing right up at the front of the curve. The only issue will be how frantic players are to try and give the February CP price a bit of a push. We’ve seen bids hovering around the $500/ Mt level for propane, and $540/ Mt for butane, coinciding with a last decade of February lifting from Saudi Arabia, but with crude oil prices stuttering, the paper market is struggling to get within $10/ Mt of the $500/ Mt level, while the physical supplier doesn’t seem to be eager to conclude at what they see as potentially low CP valuations. The game clearly has yet to run its course.

The main talk of the week in the U.S. centered around the let-up in the operational delays caused by fog in the Houston area, and yet another week of seemingly unpredictable EIA inventory numbers being published. I would normally expect fog delays to reduce exports and increase potential inventory levels, but exports remained the same as in previous weeks and this added to the momentum behind a slightly higher draw than most players had expected. I also believe that the bulk of players in Mont Belvieu have  given up on a late, and prolonged, cold spell impacting propane relationships, especially as we see the propane to WTI ratio struggle to get much above 30%.

More surprise seemed to be aimed at the delta developing between the value of propane in TET (LST) and Targa (Other Non-TET) against Enterprise (Non-TET)barrels. The move has gone as far as 4.5 cents/ gallon ($25/ Mt), and probably results from the reduction in exports due to the fog, which might not be showing-up so much in the EIA weekly numbers, but it is influencing demand for barrels. Add in the ability of Enterprise to process previously accumulated Y-grade barrels through their new fractionation facility, and supply within the Enterprise system is clearly outstripping demand. It only looks like a short-term phenomenon, but it again it has a slightly bearish tone to it.

This has all meant that the ARB to Asia netback has stood up reasonably well for February, in and around the 20 cents/ gallon mark, but as we look ahead to March and April the levels decline significantly. What is still a concern, is that whatever your view is on production growth this year in the U.S., the impact of more fractionation capacity, and therefore more barrels available for export, it’s still the export slots and the continued lack of them appearing as promised, that’s going to dictate what is really about to happen to the international LPG market. I believe we will enter the stock-building season well above levels of recent years, we’re already pressing close to the highest weekly stocks for five years, so the pressure is still going to be on exports and if export capacity is not there, there’s no upside for me in U.S. LPG values. Of course I might be wrong, but I’ve not seen any reason to doubt my view, not yet anyway.