SIMON SAYS: Opening the door again to U.S. “Greatness” may potentially close a few in the Middle East!

Submitted by Simon Hill on Sun, 08/16/2020 - 17:00
Opening the door again to U.S. “Greatness” may potentially close a few in the Middle East!

My mind has been playing a few games with me this week, maybe it’s been the tropical weather we’ve been enjoying, or perhaps it’s just my age. My head’s been telling me there’s a major swing in influence taking place in the world right now, and LPG might just be linked to it. You see, I’ve got this theory that the most important words spoken in recent history by President Trump was on Wednesday 8th January 2020, when he said, “We are independent, and we do not need Middle East oil”. Yes, the U.S. is now the world’s leading oil producer, ahead of Saudi Arabia and Russia, with U.S. crude oil output doubling since 2011 to nearly 13 million Bbls/d, that’s before coronavirus, and with approximately 3 million Bbls/d being exported.

Now I’m not trying to get into an argument of fact, I know it’s round holes and square pegs when it comes to what type of crude oil the U.S. generally requires for its refining system, historically being built to handle heavy crude oil to churn out motor gasoline, diesel and jet fuel, while U.S. shale oil is very light. Certainly, the pendulum has now swung to local heavier crude oil imports from Canada and Mexico, pushing the likes of Saudi Arabia and Iraq down the list. But the import numbers are getting smaller and smaller each year, and with the recent closure of Marathon’s Martinez, California and Gallup, New Mexico refineries, joining HollyFrontier in Cheyanne, Wyoming, and P66 at their Rodeo and Arroyo Grande California facilities, it’s likely the imbalance will continue to squeeze in favour of U.S. sourced light crudes.

So maybe President Trump is right for once, but as a consequence it’s going to throw up more serious geopolitical shifts in world power, and that means change for everyone, including those weaving through the complexities of LPG supply and demand scenarios. Like others, I’ve seen a major shift in attitudes and actions following the out-break of coronavirus, as if the disease has been the catalyst. No longer do we see the U.S. protecting at all cost the supply of oil in the Middle East. President Trump wants out, and you can see why, years of intervention by the U.S. has been bogged down in unsuccessful military campaigns and sanctions, costing American lives and huge amounts of dollars. The “independence” of having shale oil and gas in your back yard is something other Presidents dreamt of.

We’ve seen the U.S.’s lukewarm support for Saudi Crown Prince, Mohammed bin Salman in recent months, pointing to what’s likely to lay ahead, with Saudi Arabia being forced to seek alternative investments, and income streams, to dilute its dependence on crude oil sales and U.S. protection. Nerves are jagged across all the Emirate states, especially as the U.S. now has a reason to temper it’s jingoism towards Iran. Nobody really envisaged a war on Iranian soil, the consequences for any U.S. leader would have been grave to say the least. The recent normalization of relations between Israel and the UAE may also point to concerns about future U.S. involvement in the region, especially as it might impact both countries.

And as the U.S. appears to recoil back to a more domestically driven economic, rather than political influence in the world, the other super power China has really been running around unchallenged, throwing money into Iran, challenging island ownership in the South China Sea, and of course implementing the power of Beijing in Hong Kong. The upcoming resumption of the U.S./ China trade talks will no doubt be influenced by Hong Kong, but also by spats regarding TikTok, WeChat, Huawei and the true origin of the coronavirus out-break. The economic rebalancing of U.S./ China trade is a central feature of President Trump’s “make America great again” campaign, so I have very low expectations of the virtual trade meeting, and surely bigger disagreements may well emerge.

Now a lot of you are saying that’s fine, but where does LPG fit into all of this? In the current state of play it’s about LPG exports from the U.S. starting to dominate the world LPG stage, not just in numbers but in influence. I’ve said before that the heady days of CP power and control in the market may well be numbered. As OPEC+ crude oil production falls have impacted LPG exports from the Middle East, not only as a result of coronavirus, but also the worrying demand signs that were already visible in late 2019, as future growth may well be limited due to the major shift away from fossil fuels. Only last week I was reading BP’s CEO, Bernard Looney, talk about BP being ready to “think outside the barrel”, identifying devastating problems for the fossil fuel sector, and forcing the company into a significant shift to climate friendly operations. Of course there will always be a home in Asia for CP priced tonnes, the infrastructure is difficult to change overnight, but CP’s influence on the world has never been lower in my opinion. It seems Pertamina, a recent stalwart of the CP system, have contracted for a mini-term FOB contract out of the U.S. Gulf Coast based on Mont Belvieu pricing.

Even with crude oil prices having come under downward pressure in the fourth quarter last year due to concerns over demand, that have been further exacerbated by the destruction caused by the on-going coronavirus, U.S. production has kept surprisingly healthy with daily numbers above 2.2 million Bbls for propane. Although there is still skepticism in the market, the talk last week was also of record August LPG exports, with some punters suggesting as high as 4.2 million Mt. At these levels, the U.S. would be way ahead of all the Middle East exporters put together. Given the clear daily market price relationship of Mont Belvieu, the influence of movements in WTI and Henry Hub natgas, coupled with an increasingly liquid derivatives market, that surrounds both U.S. and Asian FEI pricing, how can the current CP really justify its survival in the longer term.

Now there’s still talk of record cancellations in August and September, something of a paradox to what I’ve been saying, but it appears that exporters are trying to jump back into the market to re-sell these cargo withdrawals, and talk is also of postponement rather than actual cancellation itself, as traders look to arrive in an Asian market uplifted by the pending winter demand. But you wouldn’t believe it if you looked at the forward curve, with FEI as flat as a pancake from October until the end of the year.

But this SIMON SAYS is not really about the market last week, it was quiet anyway, with holidays and a general slowdown of thought. Demand is still the dominant factor, whether it’s concern for this winter or any future winter. What may well throw a lot of predictions up in the air is this shift in U.S. policy towards the Middle East, and I feel this point is going to be very important.

So, I hope you get the picture I’m trying to paint, where the U.S. can now concentrate on making its economy the world power base, non-reliant on politically motivated, and regime-led, crude oil exports from the Middle East, more driven by self-sufficiency but in a diminishing oil based economy, where the battery and electric engine will become the driving force of transportation, coupled with other software developments, all led by U.S. business, and the odd South African born businessman. Okay, it’s been a quiet week and my brain has been playing games, but the writing’s on the wall as far as I’m concerned, especially for a business driven President (maybe business only!). But then bets might be off in a couple of months’ time anyway, as the writing on the political wall might just be the same for President Trump!