Yesterday we were looking at the OPEC announcement to cut crude oil production by 500 M Bbls/d, and the subsequent announcement that Saudi Arabia would maintain its voluntary and additional 400 M Bbls/d production drop. Just to show how difficult it is to gauge reality from rumour, there were strong noises coming out that earlier, Saudi Arabia and Venezuela had actually proposed a 500 M Bbls/d increase, even though this was of course strenuously denied. There were those questioning whether the group as a whole could stomach a drop, and Saudi Arabia appears to have used their muscle to push through the cuts, but in my book, it again plays into the hands of the non-compliant members including Iraq, Nigeria and OPEC ally Russia. Time will tell.
But overall the news was good for the oil markets, which enjoyed something of a rally last week, where both Brent and WTI crude oil were stronger on the back of positive Purchasing Manager’s Index (PMI) data, solid U.S. economic numbers and optimism over the U.S.-China trade deal. Chinese manufacturing activity had underpinned crude oil at the start of the week, with factory operations expanding at the quickest pace in almost three years, according to both state and private data. U.S. jobs are still on an upward trajectory giving fans of Wall Street a 300+ point jump on Friday. Although optimism on trade talks are normally followed by pessimism, there are still discussions continuing between Beijing and Washington. There was an olive branch from China on soybeans and pork imports from the U.S., and that also gives us certain a degree of optimism that LPG might find its way under the same branch, although Washington is still insisting that further U.S. tariffs will be imposed on 15th December, and that is also drawing talk of Chinese countermeasures, Happy Christmas to one and all!
But as we close-in on the festive period, we start to look more at the future, especially 2020, but also beyond, and the big question still on a lot of trader’s minds is whether the continued cutting of OPEC production quotas, even with the re-enforcement of Saudi Arabia’s voluntary reductions, will be enough to bring crude oil market equilibrium back in line, especially with rising U.S. output and the drop in world oil demand growth. These broader questions are starting to filter through to U.S. LPG prices and the good old ARB. We’ve heard a lot of U.S players say over the last year or so that exports have to account for nearly all the growth in production if U.S. NGL prices are going to have any chance of recovering ground on WTI levels. As measured by ratio of NGL prices versus WTI, NGLs are still below 40% and are in fact starting to ease back down again to 35%. Even strong petrochemical margins and bursts of cold weather aren’t going to dislodge the importance of exports.
But what should we, as part of the LPG world, be thinking? We tend to look at the obvious, especially as the U.S. market is far too complex for anyone to really have their finger on the pulse, maybe they see the drift, but how it all adds up is another matter altogether. Last week a few people started talking about the U.S. NGL market, stating their concern that production over the next five years was hitting a wall. I won’t say anyone felt it would actually fall, but you could have been convinced that this is what they had at the back of their minds. The Baker Hughes rig count still carries a lot of weight in the minds of the international LPG community, and last week 3 more rigs dropped off the count. This is the fourteenth fall in the last sixteen weeks in the crude oil patch, a total of 107 less rigs than four months ago, and in 2019 as a whole, we started with over 850 active oil rigs, and the total is now nearer to 650. But natural gas rigs did increase by a couple, and there were more oil and gas rigs in Canada. Of course even as the rig count has dropped, crude oil volumes have still gone up, with oil production jumping from 11.7 MM Bbls/d at the beginning of the year to 12.9 MM Bbls/d currently, an all time high.
And of course we believe this then translates into more NGL production, and to the international player, more LPG exports, don’t we? The EIA propane production numbers, that include refinery volumes and purity propane from fractionation, are heading in one direction and that is up, and yes the steepness is the question we are all asking, but with all things considered, the growth looks very much as if it will continue for the next five years. Even taking a base case of $55/ Bbl for WTI crude oil, I would expect LPG production available for export from the U.S. Gulf to increase by 500 M Bbls/d by the end of 2025. With exports from the U.S. east coast and west coast (also including Canadian seaborne volumes) this is going to equate to more than one VLGC extra per day.
We did spend some time last week in London, totting up on our fingers the number of additional VLGCs we expect to see at some time in 2020. We said Enterprise would be up 7-8 VLGCs per month due to the increased loading speed, but we doubted the 10 per month figure would be reached until the end of the year, when a new expansion is due to come on-line. We felt exports from P66 out of Freeport were up by a couple of VLGCs a month already, and we could see numbers increase by another 1 or 2 per month next year. Energy Transfer out of Nederland should be able to match P66 by mid-year, and maybe one or two per month extra exports from Targa. We came up with a figure of around 15 at the early part of 2020, rising to at least 20 by this time next year. Now a few of you might argue that Enterprise are already up by 3-4 cargoes per month, and P66 are also releasing a couple more cargoes. But even if we say 10 cargoes, it’s still 5.5 million Mt per annum. So if we get to the maximum, then it will be closer to 10 million Mt in 2020. This is when the fractionation and the terminal capacity increases, so why not, but I know a lot of people are saying it’s going to be more like 3 or 4 million Mt in 2020. I just think there might be a few surprised faces in 2020. By the way, at 500 M Bbls/d in 2025, exports from the U.S. Gulf will be running at levels 17 million Mt per annum higher than we are seeing today, just to pop in your notebook.
By 2025 I believe the market will need 70+ new VLGCs. We’re already in 2022 delivery, and we’ve hardly got 40 new buildings on order. But all that means to me is that we are in for a strong shipping element of the ARB, but the ARB will have to stay open and product will have to keep finding homes in Asia. Bring 2020 on!
As far as trading positions are concerned, always best to not over trade and hold!