Once you hit your late fifties, you’re supposed to start saying, “it’s not like it was in my day”, whatever that might mean. Without doubt the politicians of today are certainly different to what I can remember, as are their advisors. In the U.K. Boris Johnson has Dominic Cummings as his chief advisor, a man who orchestrated the “Leave” campaign, as well as the stonking majority Boris won at the recent General Election, and is now advising that he is adamant on getting as many “weirdos and misfits” into the avenues of government. Interestingly one that unquestionably fitted the bill, but has ended-up exiting unceremoniously from under Cumming’s control, has caught my eye. Andrew Sibisky was a “super-forecaster”, a word Cummings was heard muttering as he was confronted by journalists leaving his London home the other day!
Was it the Danish physicist Niels Bohr, or the man of many quotes, New York Yankee’s baseball player Yogi Berra, who said that “predicting anything is difficult, especially when it’s about the future”? So can we spot any of these super-forecasters in the LPG space? Before you put your hand up, don’t forget the premise of the term is that clever people, not necessarily geniuses, who don’t have a vested interest in the subject, and are described more accurately as amateur forecasters, more often than not do better than the so-called experts! If you don’t believe me go and check-out Philip Tetlock and Dan Gardener’s book on the subject. I’ve kept my hand down by the way, probably more out of fear than anything else.
However much of an expert you feel you are on the comings and goings of the LPG market, it’s difficult to get a good grip of what’s currently happening, let alone what might come to light in the future. But here goes. I think we are all in agreement that the coronavirus, or COVID-19 as it has been renamed, is still just about the main headline impacting the LPG market today, although the cutting of Chinese tariffs on LPG imports from the U.S. is fast on its heels. For me the energy market has moved quicker than the actual spread of the virus itself (so far anyway), which appears to be receding due to the severe measures taken by the Chinese government. The alarming forecasts of potential drops in demand, expected but not yet realised, sent crude oil in a scurry downwards, only to twitch OPEC into action. The recent Saudi Aramco nomination acceptances came out this week with three to four cargoes either cancelled, or postponed. As crude oil recovers some 50% of its losses, CP has again firmed up above the $400/ mt level for March, with this strength at the front of the CP curve causing the backwardation through to April to become even wider. It’s the front of the curve that is getting most of the attention, as the “demand” uncertainties will continue to negatively plague the levels further down the CP curve.
The news this week that’s already gathering pace, is the announcement by the Chinese government on Tuesday that 696 items imported from the U.S., including LPG, will be free of the circa 25% levies previously imposed. In fact the Chinese government are already accepting requests from Chinese LPG importers for immediate tariff exclusions. This should start to re-balance the international market, especially as Chinese PDH buyers will be able to directly take-in U.S. origin propane. But let’s not forget that although the product premiums being paid by Chinese importers will reduce, the extra freight from the U.S. to China, versus discharging into Japan, can be anything between $10 and $15/ Mt. This will still encourage players to maximise U.S. cargoes going into Japan and Korea, freeing up other cargoes from the Middle East to continue going in to China. Also we shouldn’t ignore the buying requirements of the Indian importers. Hit by cancellations and cutbacks in supply from Saudi Arabia especially, they will be looking to buy from the west, especially arbitrage cargoes from the North Sea, northern Russia and Algeria. With the widening of the East/West Arb, there will be those keen to see U.S. cargoes forcing European prices down, enabling exports via Suez to take place. We are also getting close to Marcus Hook returning to summer export levels of about 10 cargoes per month, which will help to resonate this trade.
But, as we continue to wonder how strong world LPG demand will actually turn-out to be, especially from the second quarter onwards, we still face supply questions, not just in the Middle East but also from the U.S. itself, especially with regards the capacity to export. Although the recent weather in the U.S. has been on the warmer side of average, we have seen two significant drops in the weekly EIA propane inventories, with February stock levels down more than 9 million barrels so far. Some may say this has been the norm in two of the last three years, but others feel it is not only more than expected, it just doesn’t add-up. With crude bouncing back, there is certainly a degree of bullish optimism in the short term behavoiur of the LPG market players, but it might well be short-lived. The data looks as if it could be skewed by private storages, predominantly in the hands of the petrochemical sector in the U.S., buying product but not having to report it as stock. Only the wholesale storages have to report to the EIA their weekly stock levels, even though this was supposedly expanded to include the petrochemical sector in June last year, with the introduction of Form EIA-815. I understand that the new form is a work in progress, and might well happen before the build season kicks-in. With propane currently the pick of the NGL olefin cracker feeds in the U.S., it makes sense for the petrochemical buyers to build future stock, but with the forward market contango relatively flat, this does question how big an incentive there really is to hold barrels in storage.
So with stock levels above the peaks of the last five years, draws being questioned as to their validity, and more LPG production on the way, especially once the fractionators are up and running, we again look to what volumes can the exporters get over the dock. To back-up any thoughts I might be unravelling in my head about export capacity, I tend to deviate to the VLGC shipping market. It tends to reflect the supply “state of affairs” better than probably anything else.
The OPEC cutbacks, especially when seen from Saudi Aramco’s export volumes, has without doubt reduced LPG supply in the Middle East. And guess what, freight rate levels for voyages from Ras Tanura to Chiba have slipped from above $80/ Mt only a month ago to barely higher than $65/ Mt today. Yes, there are a few more new ships in the market, but together with dry-docking of 5 year old vessels, and the fixing of scrubbers to other VLGCs, it all pretty much equals itself out.
As far as the Houston to Chiba rates are concerned they’ve followed a similar path downwards, from mid $130s/ Mt to now sub $115/ Mt. There’s probably an argument to say that ship owners started pushing vessels over in the direction of the U.S. in January, rather than waiting to see what happened with Middle East cargoes, already in decline. In addition with the free fall in the FEI, narrowing of the ARB and serious questions about Asian demand in March and April, charterers have backed-off, even though they hold stems in the U.S. Gulf, which ultimately will have to have ships nominated against them. But, with near double digit premiums still being talked, why rush, selling fob and letting the ship owners take some of the strain seems a plausible strategy.
I think it might be time to get the super-forecasters in to try their hand at LPG, as a smaller crowd of so called experts disappear for Institute of Petroleum (IP) week, surely they can’t be any worse than my forward opinions. Oh yes, we might also need to keep an eye on Iran, as it looks as if the hardliners will win the current elections, and their advisers put our Mr Cummings someway down the list on the “people of reason” chart!