SIMON SAYS: So why isn’t U.S. propane heading out the door?

Submitted by Simon Hill on Sun, 10/06/2019 - 17:00
So why isn’t U.S. propane heading out the door?

There’s an unusual feel about the LPG market at the moment, with a number of questions that just seem too difficult to answer, some may never get answered. One question though that always seems to be on the lips of LPG players around the world is the weather. It’s not just the way us Brits, as we are affectionately referred to here in Texas, start a morning conversation, it’s also what drives our market, especially over the next couple of quarters. Whether the weather is colder or warmer than averages, sorry I had to get that in, will ultimately determine which way prices are likely to move. We might not be clamoring anymore for a copy of the USA today, as I did in the 90s, to see the back-page weather map, but I bet we are starting to sneak a view at the forecasts, the averages and whether there’s any chance of a polar vortex sending cold air south this winter.  

Whereas the LPG space tends to be seasonal weather map onlookers, the natgas world, especially here in the U.S., is dominated by the weather all year long. In the summer they love it hot to drive the air-conditioners, that drive the power stations, that use more natgas. In the winter if it gets cold, then natgas demand for heating goes up, storages get drawn, and the air-cons are still on in Florida! I think this winter we’ll have as close an eye on the weather as any natgas trader, in fact, we should be starting right now!

In contrast trying to predict propane inventories should be a lot easier than forecasting the weather, but sadly it doesn’t seem to be the case. It appears that we are heading towards a final peak, sometime in October, maybe in November, of around 103 million Bbls of propane. I hope you appreciate how precise I’ve been, but don’t bet on it! It might be 3 million Bbls shy of the records in November 2015, although it’s still damn high. But if we do get the polar vortex then all’s well that ends well, isn’t it?

There are voices here in the U.S. that are starting to question whether the international market will be the saviour at the end of the day, and especially in the next six months. They realize that the LPG export supplies from the Middle East have been hit, both by the drone attacks on Saudi Arabia, and the increased grip being placed on Iranian exports. But it’s not sucking propane out of the U.S. in the way many market commentators had hoped, even expected, as traders look to load up on a couple of butane tanks for Asia, leaving behind a couple of propane tanks for another day. With the ARB in the high $160s/ Mt, low $170s/ Mt, surely it must be spurring more interest than we have yet to see materialise for propane exports. Clearly not, when we look at last week’s EIA propane exports hovering just above 1 million Bbls/d, circa 250 M Bbls/d below the peaks of the second quarter. Yes, there’s more butane being lifted for export but clearly the extra slots we were anticipating, just haven’t materialised as we were expecting.

I did see a very well-respected Enterprise employee the other night whilst I was out with friends, who would certainly know what he’s talking about, I asked him and he was clear, that the new slots, were pretty much signed, sealed and will be delivered - soon!

As I mentioned, buyers are pushing suppliers for a couple of tanks of butane instead of propane, but the terminals and re-sellers are finding it difficult to make the export quality normal butane available at such short notice, and those lucky enough to have the butane are offering it on the market as high as 15 cents/gallon terminal fees. So, I wouldn’t get too excited yet about seeing more propane exports appearing in EIA numbers, it’s being ditched for normal butane and that might continue for a few weeks yet.

You might also be sensing that this widening ARB, is starting to also get sucked up by the increasing cost of freight, with mid $120s/Mt getting fixed for Houston to Chiba, and $2 million per month time charter rate equivalents again looking very much on the cards. Apparently, shipowners aren’t returning calls, they just don’t have open ships available. How times have changed! What is surprising, is that with cutbacks in the Middle East, from Saudi Arabia and Iran, you’d expect open ships to start appearing, but it’s not the case. A few are carrying on, heading in an easterly direction after discharging in the Far East, to get a slice of the bounty being offered on U.S. Gulf liftings. In addition, the 2-3 cargoes out of the North Sea, and parceled together from northern Russia, are also extending voyage times and therefore ton miles, taking cargo east. If you’re the son of an owner, I’d get your Christmas present list in early, it could be a bumper year!

Therefore, it suggests to me that the market is going to have to see lower propane prices in the U.S., to try and attract interest from buyers to purchase propane, but the buyers need ships and they need slots, both becoming a little rare these days to say the least. They also need buyers, and the barometer of interest, the Ginga window, as well as the forward paper curve in Asia, are not raising the heart rate to say the least.

We are still seeing the usual suspects when it comes to tenders; IOC, Pertamina and Formosa (FPC). Although, FPC ended up buying a 44,000 Mt propane only cargo for a mid-November arrival, and have issued a further tender for a half cargo of either propane or a split of 11,000 Mt of propane and 11,000 Mt of butane. With the recent surge in LPG prices out of the Middle East post the Saudi attack, and especially for butane, there’s been a strong indication from feedstock buyers in Asia that butane could potentially fall off the menu, with butane buying possibly down nearly 20%. Unfortunately for potential propane sellers, propane consumption in the petrochemical plants is also starting to edge down as relative prices edge up.

In addition, the stock positions in both Japan and South Korea are adequate, allowing buyers to continue to feel relaxed about their forward buying plans. The contango fever that had gripped the paper FEI market, for the balance of 2019, is starting to flatten further and in fact is edging into backwardation, except for some concern still at the front of the curve, with no real end user demand showing through, not yet anyway.

The Ginga window is still looking lackluster with only odd bids and offers making it to the broker’s blasts. What appears to be position tidying in the first half of November is barely creating much of a market, but what little exists, hangs in around minus $5/ Mt value. It’s hard to get propane buyers or sellers excited in Asia, not yet anyway.

This just feeds back, via more and more expensive freight levels, and less visible incremental loading slots, to a pretty subdued lot of traders and other parties, who are less willing to press the go button for propane exports. You can see now why U.S. players have more than a doubt in their minds, as to whether exports are going to be the nirvana U.S. producers had started to take for granted.

Tomorrow I’m going to explore what alternatives the U.S. market has so be prepared for the odd weather map appearing!