SIMON SAYS: LPG looks like it’s going out of 2020 with a bit of a Bang!

Submitted by Simon Hill on Sun, 01/03/2021 - 17:00
LPG looks like it’s going out of 2020 with a bit of a Bang!

I normally try not to say “bang” and “LPG” in the same sentence, I think it is asking for trouble, but I have to admit the numbers are suggesting it’s exactly what we are seeing as 2021 begins. Despite the news of the quickly spreading COVID variant forcing more lockdowns, the disappointing inoculation rates coming out of the U.S., where only 1 million people were vaccinated in the first week despite an initial monthly target of 20 million, and demand forecasts for oil, as well as most things, slipping further along the timeline, the LPG world in contrast is on a bit of a roll! How long it will last, and the reasons why, are always a little dubious at this time of the year, but the numbers never lie, do they?

We all know the reasoning behind the over-inflated (more often than not) Saudi Aramco Contract Price (CP), whether it’s the previously imbalanced supplier/customer relationships, the fact it’s set by the seller and only once per month, the captive Indian market who, together with other Asian importers, pass the price through the domestic LPG system, the stock valuation accounting games persuading buyers that higher prices make sense, and of course the trader’s ability to aggressively push-up physical markets while benefiting on the paper side of their trading books. But even they’ve been shocked by the announcement that January’s CP for propane has been set at $550/ Mt, not just because that’s $100/ Mt above December, but the fact that Wednesday’s derivative values were judged to be nearer $520 at the day’s close. Even if you’ve been playing the game “The Mind” over the holidays, there’s no way you could have anticipated such a gap between the market players expectations and the reality of the pricing committee sat in Dhahran.

Then what about the reports of a brutally cold dome of high pressure across eastern Asia, that has resulted in probably the highest barometric pressure reading ever recorded anywhere on earth, although it’s questionable how directly it impacts the weather in North Asia, the temperatures are certainly below averages for this time of the year, and that’s pushed-up the front end of the FEI curve, higher than just the momentum of advancing Brent prices. Cash differentials for the January/ February FEI spread have jumped close to $50/ Mt. That’s strong in my book, and when you see backwardation resulting in a $150/ Mt drop in FEI derivative prices between today and the end of April, it’s hard not to expel air quickly and rise our eyebrows.

The strong Asian market has also enabled the ARB to flex its muscles, and for January we’re seeing a differential up in the mid $230/ Mt. To me that’s sending signals to the traders to go and grab cargoes in the U.S., and rush them over to Asia. Of course it’s easy to say that, but the reality is that nothing gets rushed these days, whether it’s finding loading slots, delays in berthing, with a number of ships still waiting to load before the year-end, Panama Canal delays, with southbound transition from the Atlantic side to the Pacific, still taking 2 weeks, as well as the month it normally takes anyway. Then consider the steep drop-off in FEI levels when loading in late January, and maybe arriving in the second half of March given the delays, then buying interest drops. With such massive spreads in monthly FEI levels it becomes very important whether your cargo is arriving first, or second half of the month, as the dichotomy between prices in the two periods becomes more than just visible. So yes, the ARB is pretty wide but the inclination to trade has certainly taken a holiday break! 

Then there’s the unbelievably strong VLGC market, although believing is becoming much more the norm, as the list of ships dwindles, yet the list of bullish factors just keep rolling in. The delays in transiting the Panama Canal have been with us now for a few weeks, and without doubt the worsening COVID-19 crisis in Panama itself is severely impacting operating hours, as a lack of staff and more time consuming procedures, related to the virus, take their toll. There’s also been the uplift in passages of LNG tankers and container ships through the Canal, taking more of the limited slot availability, and pushing any VLGC without a date, or arriving outside of it, to the back of the queue. The Panamax VLGCs are back-in vogue and attracting premiums over the Neo’s, as passage through the older locks is less congested. There was a hope of some sort of slow down in rates, as Middle East exports were waning under the strict OPEC+ cuts, resulting from COVID’s impact on oil demand, and together with the appearance of trader relets just before Christmas, we thought the Baltic might at least soften, encouraging ships to head west. No chance, as the handful of available ships disappeared, while a couple of Indian requirements surfaced, pushing the market back up to $110ish/ Mt. So with monthly time charter equivalents of over $100,000 per day, the corks have still been popping in the homes of the ship owners. As I said last week, this scenario isn’t going to change fast!

Why? Because U.S. production is still going up, albeit by small increments, with EIA numbers this week at 2.329 MM Bbls/d for propane, and most players expected sub 2 MM Bbls/d when oil prices and rig counts went south last year. Add-in the record exports, with December likely to be the highest on record, that’s if they managed to get those last ships loaded by year’s end. Whatever happens December exports are going to be close to 5 million Mt, and that’s way above any other month this year, showing the capacity is there. The EIA’s propane export numbers on Wednesday jumped 133 M Bbls/d, that’s nearly two extra smallish VLGCs loaded in the week, and in total it’s up at over 1.6 MM Bbls/d. To me that’s going out of the year with a bang, and we still have the impact of higher crude oil prices and more rigs in use to bolster numbers further in 2021.

The other market that went pop this week was normal butane in the U.S., specifically within the Enterprise system (Non-TET), which ended trading on Thursday at some 116 cents/ gallon, up nearly 30% in the period, and just over an amazing 40 cents/gallon higher than LST (TET) normal butane, with Targa (Other Non-TET) nearly 30 cents/ gallon underneath also. Clearly a trader is short, as I doubt we’ll know if there’s been any problems for Enterprise themselves, and “the extra volumes for export” argument just doesn’t make sense given that even delivered Targa Bbls would come up nearly $60-70/ Mt above the butane market in Asia. But the volumes are low and the “bang” not so deafening, therefore the differentials between systems is bound to close when players are back at their desk, sorry kitchen tables.

I still believe crude oil prices have also left 2020 with something of a bang, but that’s compared more to the early days of demand destruction and the Saudi/ Russia head to head, if you measure WTI and Brent year on year, they’re down over 20%, but I’m still counting them in my “Bang” list. As you move your trading book into 2021 there is still a lot of uncertainty ahead, but as with last year, uncertainty, volatility, and my own “Big Bang” theory all make trading exciting , and extremely profitable! Happy 2021!