I’ve always found it difficult to understand how on earth anyone makes money with an LPG purchase deal based on Saudi Aramco’s Contract Price (CP). In fact, I’ve rarely found anyone else who knows how it’s done either. But around this time of year, every year, CP becomes the talk of the market, as if it possesses this mesmerizing draw, sucking in believers and non-believers by the score.
It really seems as if the LPG market has tried to move towards a greater degree of homogeneity in recent years, especially in the face of a market that has become far more multifaceted, truly global, more transparent, and increasingly influenced by corporate performance, in relation to stock market valuations. But I think the complexities and differences are far more exciting!
As the geo-political world enters that post incident period of claim and counter claim, the markets are trying to gauge what this means for numbers, the direction is clearly up. But there seems to be discomfort or even distress, trying to work out how far prices could move up, and how long this will all last, not just until we get to know the true extent of the damage, but also how long it’s going to take to repair.
I’m just flying over Newfoundland, Canada on my way back from what’s becoming my second home now - Houston, Texas. I don’t know if you do it when you’re flying, but I tend to think-back on my life, well that is, ever since I stopped flying with a hangover after a big night out doing the compulsory “smooching” with clients. I certainly don’t miss those days, or do I?
I’ve eluded to how the Asian market had lost its mojo in recent blogs, not unexpected at this time of year, but it’s thrown up a lot of questions as to what happens next. In yesterday’s blog we concentrated on the East/West spread, but today I need to answer where the U.S. / Asian ARB is heading.
In Friday’s SIMON SAYS I talked about the move in Asia, away from the relative rigidity of the Saudi Aramco Contract Price (CP), and more towards greater spot pricing, especially as supplies are increasingly related to both Mont Belvieu and Far East Index (FEI) price indices. We know that the majority of cargoes will head to Asia, but what drives cargoes at the margin to seek a buyer in North West Europe, especially when originating from the U.S.?
Every time I keep looking at U.S. production numbers growing, or I hear the latest from Jim Teague announcing another export capacity expansion out of Enterprise’s LPG terminal in the U.S. Gulf, I get a bell ringing in my ear to remind me to question where all this new LPG will end up going. I know logically that additional U.S. production will find a home somewhere, as all incremental production does.
In part one of the Blog, I gave you a flavour of the incredible development of LPG in Indonesia, taken very much from my own unique perspective. I explained it was for strategic reasons that the contract was taken, but, why do traders see supply contracts with Pertamina in Indonesia through such rose-tinted glasses?