SIMON SAYS: An LPG market Shaken but not yet Stirred!

Submitted by Simon Hill on Sun, 02/28/2021 - 17:00
An LPG market Shaken but not yet Stirred!

He could shift markets with only a few words, he was the architect of propelling Saudi Arabia to become the dominant force in the oil world, and he was even briefly taken hostage at an OPEC meeting in 1975 by the infamous Venezuelan terrorist Carlos the Jackal. Many in the western world also felt they were being taken as a hostage, to OPEC’s ability to control supply, forcing prices higher and higher. Sheikh Ahmed Zaki Yamani died in London earlier this week aged 90. He had set the stage in the oil market for my initial years in the business at The British National Oil Corporation (BNOC) in the early 80s, and next week the grouping of oil producers now called OPEC+ will meet (virtually), to tinker once more with the forces of supply and demand. As always it will have repercussions for the worldwide LPG sector.

Twelve months of demand destruction, followed by a fairly limp return of global economic growth, is the backdrop to the meeting. The members of OPEC+ feel it’s time to ease back on the production cuts made last year, but there’s still a degree of hesitancy and uncertainty on show. Compared to the beginning of 2020, OPEC is still withholding over 7 MM Bbls/d of crude oil output, around 7% of world supply, and if oil prices are anything to go by, the recent jump to the mid $60s/ Bbl would suggest supply could be tweaked up 500 M Bbls/d from April, without bringing any real calamity to the market. Anything more may well see profit-taking, while anything less can only mean $70/ Bbl by Easter. For the LPG players eagerly watching from the sidelines, there’s at least two reasons for keeping their oil news feed open awaiting OPEC+s final decision.

Any production increase will be pleasing news for ship owners, and those traders with vessels under their control, as position lists in the Middle East just get longer and longer, while cargoes for the first decade of March have pretty much dried-up. The Baltic rate for a Middle East to Asia voyage has dropped below $30/ Mt, with ship owners barely covering operating expenses (OPEX), and that’s if they can get a fixture in the first place. There’s the odd cargo being talked about in the second half of March, but it’s more likely to be a mirage than a firm shipping requirement, and any OPEC+ decision to increase production, especially if it’s going to emanate from Saudi Arabia, isn’t due to happen until April at the earliest.

In addition, if a moderate production increase is finally agreed, then traders can also take some comfort from the likelihood of crude oil prices continuing to rise, especially if it pushes naphtha prices up faster than the price of propane. Certainly in recent weeks propane prices have started to struggle to keep pace with increases in Brent and MOPJ (Asia’s main naphtha price index), even though many buyers would argue that propane is still too expensive. What seems to be missing at the moment in Asia is any real concern from buyers in relation to the current supply shortages at source, not just from the Middle East but also from the U.S., with an apparent unwillingness to bid-up FEI prices in order to secure cargoes. But, as propane starts to become more attractive as a feedstock, especially for the relatively new olefin crackers in China and South Korea, demand might start to pick-up.

However optimistically I might try and portray the potential for a revival in Asian demand, I can’t ignore that this week’s Ginga window appeared to have had two of its main protagonists somewhat retreating from the custom of pushing-up their bids, especially as it’s CP primetime. Maybe this is a sign that however short the supply side looks, demand is not up for the fight. Others may say why push a market that’s already moving up on the back of the crude oil price anyway. Time will tell.

Although developments in both the Middle East and Asia have taken some of the spotlight away from the impact of the “Texas freeze”, they are still as inter-locked as ever. My concern though, revolves around the trader’s appetite for risk, especially following such a huge correction in the LPG market in the last month, with more traders than you might think being on the wrong side of the market. Facing a roller-coaster of information on how strong Asian demand really is, traders are getting increasingly troubled by the degree of backwardation remaining in the market. Now, a lot of this has been brought-on by their own actions in strongly pushing physical and paper prices at the front of the curve, but you sense traders are worried how this will all pan-out, especially as we leave the bosom of winter. No better example can be found currently in the U.S. export market, as commentators focus on the operational return of the loading terminals after the winter storm, debating whether it will take 5 or 7 days for catch-up from the delays, what the likely effect of fog warnings this current weekend would bring, and continued concern over inventory levels, even though Wednesday’s huge draw in EIA stock numbers were full of weekly one-offs!

In the meantime the traders, to put it mildly, are hesitant with a big “H”. Okay the March ARBs this week have been gyrating around in the $90-100/ Mt range, but there have been signs of theoretical netbacks widening a little, and at least the ARB door is just about open. Then add-in the fact that freight levels  continue to weaken on the back of a growing number of open vessels on shipbroker’s lists, and you start to wonder why more trades are not being concluded. There was one deal done, but a sale to a South American buyer is not an ARB cargo in the true sense of the word, sorry acronym! So, with what appears to be ships galore in March, together with exporters and re-sellers who have cargoes and slots to sell in the same month, the question is where are all the buyers? Well, they’ve all apparently fled to April, in attempt to relieve some of the remaining backwardation anxiety!

April cargoes are now being assessed in the 5-6c/ gallon bid/offer range, and given a little bit more time and emotional repair, you have to think it will lead to more activity. Surely milder weather in the U.S. will result in seasonal heating loads falling, production numbers have to get back to normal or above, and the balance between exports and inventory will continue. But let’s face it, export terminals have to get back to exporting, ships have to start moving again, and the feedstock buyers need to return to the fray. We might have lost a very eminent Sheikh this week, but the LPG market itself needs to shake itself-up, forgive the pun!