SIMON SAYS: Short today, Long tomorrow

Submitted by Simon Hill on Sun, 12/08/2019 - 17:00
Short today, Long tomorrow

Rumours surfacing, resurfacing, announcements, pronouncements, you guessed it, it’s OPEC time again. It seems more and more the case that whatever OPEC announces our attention in the LPG world, and for that matter the rest of the energy market, switches to Saudi Arabia, and whether Prince Abdulaziz bin Salman has said anything, he normally has to!

Oil jumped on the back of the news coming out of Vienna, as OPEC and their friends revealed a further reduction of 500 M Bbls/d, from 1.7 MM Bbls/d to 1.2 MM Bbls/d, but with OPEC already producing at rates that are lower than the previously agreed quotas, especially by Saudi Arabia and Angola, the uncertainty was whether this was purely cosmetic, or whether it would really mean a production cut. Well, as if on cue, Prince Abdulaziz bin Salman declared that Saudi Arabia would maintain its voluntary reduction of 400 M Bbls/d, in addition to any formal quota agreed by the other members. And as day follows night the price went up. It’s about the only thing that is predictable in the crude oil market these days. But surprisingly the market then came back-off, which is maybe also predictable!

LPG will be influenced, not only by the movement in the oil price, but also the impact on LPG production, especially in Saudi Arabia, as they are likely to absorb an additional 400 M Bbls/d of voluntary cuts. You get the feeling that the Middle East has pretty much shut-up shop for 2019, and with these crude oil cuts extended through March next year, then we are unlikely to see much change in the first quarter 2020 either. The odd spot cargo that has appeared from the Middle East looks to be more the result of syphoning out some LPG from inventory than excess production, I think we can kiss goodbye to extra spot volumes, and maybe in their place future nomination delays and tolerance restrictions.

The OPEC news has come on top of a week in which cargoes arriving early in the New Year are starting to look extremely hard to get hold of. In fact, Pertamina didn’t award an early arrival January tender due to supply timing issues, and gulps at the prices that were being offered. Again, with limited additional supplies from the Middle East of split cargoes, coupled with the fact that butane is out of the money in the international market for split cargoes out of the U.S. Gulf, it’s going to be tough times for buyers, needing propane and butane, in the next few week. Also, buyers in Taiwan and China, even for end December delivery, were unable to award tender requirements. Similarly, don’t forget a lot of parties fixed their business early this year, with the impending holidays, and the strength in the market encouraging traders to take profit before bonus time.

A few buyers tried to dip into the Asian “window” for January deliveries, but the word “few” better describes the activity level. Word off-market was that a first half January cargo was concluded in the low to mid-teens, which is strong, but might well get stronger once the impact on Middle East supplies takes-off.  However, second half January cargoes are certainly feeling as if they are struggling to get going, definitely as far as premiums are concerned, with suggestions of an overhang of arrivals in early February. It’s getting to that time of the winter season where traders have committed cargoes loading in January 2020 in the U.S., that will arrive in February 2020, which brings opportunity if the market’s on a bull run, but also the fear of the weather not co-operating and the dreaded “cliff”, not that we’ve seen such a drop for a few years now.  

Forget Europe this week, not because of the parties, but because the yo-yoing of this “now you see it, now you don’t” market. Well this week the cargoes are coming, and it’s giving the sell side a little more of a downward edge before Christmas. On Friday, values dropped some $25/ Mt as the swing to abundant U.S. imports in December was joined by one of the biggest North West European importers trying to re-schedule its programme and  becoming an offer in the market.  But cargoes heading to Europe from the U.S. would suggest less going to Asia, and it’s unlikely it will kick-off North Sea exports in early January, as the North West European winter should start to take a greater hold. What I did pick up this week in London, though, was that the petrochemical feedstock guys are just reveling in it at the moment, I won’t say how can they fail , but come on, it’s got to have been an earnings bonanza for them all during 2019, especially in Europe. And for certain the petrochemical buyers are going to be around for the winter, maybe for a few winters to come!

So, demand was starting to go through the gears, especially for the more prompt end December and first half January deliveries into Asia. Also, Europe was sucking in cargo, although I think most believe it was to balance demand rather than to create any potential supply overhang, but Friday’s drop may change this view. The heads were therefore turning yet again towards the U.S., and what appeared to be more than a few cargoes taking shape for loading in January, and then came OPEC news on Friday.  I think the traders will certainly need to ponder what happens next.

I’ll try to take a closer look at U.S. dynamics in tomorrow’s SIMON SAYs, but in straight forward terms, the hype surrounding the below average cold weather spell in the mid-west in recent weeks, coupled with mid-west U.S. farmer’s logistic nightmares getting propane for crop-drying, and those rail strikes up in Canada, has somewhat had its bubble deflated, as Conway prices have slipped back down below 50 cents/ gallon, with most of the problems diminishing. That being said, the Federal Energy Regulatory Commission (FERC) have allowed ONEOK and Enterprise to make changes to the original Federal order, issued a month ago, that will allow for more propane to be shipped up from the south. However, this decision appears to be centered more on specific issues, and could be interpreted as a solution, and therefore neutral, not bullish, for future propane prices in the mid-west states.

The other eye-opener on Wednesday was the propane export number reported by the EIA, which dropped by over 30% in a week. It looks as if the Thanksgiving holiday will have had some impact on the numbers, maybe the odd ship slipping over one week to the next, but again it’s worrying that we are not consistently seeing 1.5 MM Bbls/d, with the supposed export expansions and the uneconomical cost of loading butane, making propane exports more likely, especially at this time of year. The market chatter is of a hefty January U.S. loading programme, and the nervousness of the market to have deliveries to sell post first half January into Asia. Therefore, will the OPEC cutbacks change anything, or will the nerves that were clear to be seen in Friday’s North West European market start to influence Asia as well?