SIMON SAYS: And we thought 2021 was going to be normal?

Submitted by Simon Hill on Sun, 01/10/2021 - 17:00
And we thought 2021 was going to be normal?

Do you get that feeling when the world is starting to head in a certain direction, some thing or somebody, comes in and screws it all up? Whatever our political inclinations may be, we started to believe there would be some kind of peaceful handover of the Presidential baton in the most powerful and richest democracy in the world. How wrong we were! We all felt the light at the end of the coronavirus tunnel was getting nearer, as vaccines galore were being approved, only for people in the know to start questioning how quickly those shots in our upper arms could actually be administered. Then we were all getting used to the thought, maybe even the reality, of a “new norm”, and yet we now face a new coronavirus variant(s), and with it comes more cases, further hospitalizations, yet more deaths, and stricter lockdown measures, again questioning the speed of economic recovery. So, is it the turn of the LPG market to start following the same path, as new highs get recorded, seemingly day after day, driven primarily by the nippy North Asian weather feeding record U.S. exports? I think it is.

When it comes to weather I try and keep my head under the firing line, but I’m reading a lot about what’s supposedly going on, and how it will impact the mother of all LPG indicators, the ARB. Almost all of our focus in recent weeks has been centered on cold weather in North Asia pushing up prices, in an attempt to pull in cargoes from the U.S. and elsewhere. Cargoes with a big “delay likely” tag attached. Well, I’m not suggesting milder weather is on the way, but my eyes are turning more to the west, especially the U.S. itself. It appears that the infamous “polar vortex”, that fast-spinning whirl of frigid air above the North Pole, is doing a peculiar wobble that may well bring cold and snowy weather to that relatively cut-off portion of the U.S. propane system, the Eastern side, and for weeks on end. If true, it’s time to readjust your Mont Belvieu measurement acronyms from cents per gallon to dollars! It may also bring similar weather patterns to Europe, and maintain what’s going on climatically in North Asia too.

But what does this all mean? Well, for weeks now Mont Belvieu prices have been edging up, mainly on the back of crude oil but also record levels of exports, in particular propane. With the increased weather related demand in Asia, diminishing but positive PDH economics in China, and the fears of delayed deliveries, the Far East Index (FEI) has kept pace with the burgeoning freight levels, pulling the ARB wider. The expanding spread between WTI and Brent helps, but it’s been pretty much one-way traffic. Now we potentially face a further hike in Mont Belvieu prices, at a speed that looks likely to outpace Asia. Propane prices increased by 5%, and that was just on Friday this week. If the price of Mont Belvieu propane surges faster than Asia, albeit at the front of the curve, then the ARB will close.

I spoke yesterday to a couple of people across the pond who were concerned about finding propane cylinders in their local retail stores, and they had already been looking. We’ve all read the latest EIA stock report that showed another draw of 2.4 MM Bbls bringing the total propane inventory down to 72.8 MM Bbls. Okay, the expectation was for more, but in my book, a draw’s a draw, and last year stocks were 12% higher, with winter already fizzling out. But this year those meteorologists are saying the second half of the U.S. winter will be colder than the first half. Hence the jump in propane prices last week. Then add-in the huge export numbers, with December 2020 likely to surpass all records, with an amazing 5 million plus of LPG exports, predominantly propane. Every open ship in January has pretty much gone, and even with ships waiting to transit the Panama Canal maybe struggling to load in January, the likelihood of yet another very strong export month looks very much on the cards. So don’t read too much into the EIA’s 559 M Bbls/d drop in propane exports, it’s an aberration that’s likely to reverse in the weeks to come, dependent upon when and if the ARB closes.

Now back to Asia. Whatever the forecast is for further cold weather, there’s already a demand concern centered on the profitability of Chinese PDH plants, where dollar margins in the hundreds per Mt have pretty much evaporated, as propane prices in Asia have spiked faster than the price of propylene in the region. Some PDH manufacturers are considering cuts in operating levels, there’s talk of delays to opening new plants this year, and spot purchase tenders by PDH buyers have been pulled. We have also seen FEI levels surpass the domestic Chinese LPG sales prices from both import terminals and refineries, with the appearance of Chinese sellers in the Ginga window indicating somethings not right.

This being said, there’s still evidence of both Japanese and Korean buyers clambering for more cargoes out of the U.S., and maybe the impact of a very high natural gas price in Asia is allowing for more LPG to be spiked into the imported LNG, as well as increasing substitution. Of course there’s also the concern about Saudi Arabia’s bold move to cut crude oil production by 10%, taking the lead in the direction OPEC+ are looking to move, where again protecting the price is taking centre stage. So let’s not right Asia off, but let’s also not get carried away that Asia will simply respond to any hike in U.S. propane prices and VLGC freight rates.

Talking of VLGCs, they still very much remain one of the major components of the ARB’s ability to stay open or to close. There’s been no let-up in the skyward trajectory of this market. If anything it’s accelerated, mainly on the back of the Panama Canal’s year-end announcement that VLGCs will go towards the back of the transit booking queue. No one likes to wait in-line, especially at the back. So to exacerbate what is already a dozen or more VLGCs hovering aimlessly on the Atlantic and Pacific sides of the Canal, with the expectation that this problem for LPG ships isn’t going to go away fast, turns what appears to be a negative for ship owners into a “ton miles” positive. Already VLGCs are trying their luck via Suez and the Cape of Good Hope, as non-recoverable waiting time and daily demurrage rates become too much of a gamble. So don’t expect freight rates to come down anytime soon, there’s already talk of $200/ Mt from Houston to Chiba, and projections as to how long rates can be kept above $100,000 per day. I believe the record is about 40 days, give or take, set in the summer of 2015.

As the week began, notional net-backs from Asia to the dock in Houston stood at 15 cents/ gallon. By the end of the week they were struggling to find much room above 4.5 cents/ gallon. So as the U.S. political debate explores the chances of the President suddenly resigning or being pushed, the LPG world is deliberating whether a slowing demand in Asia, coupled with higher and higher freight rates, will suddenly close the ARB door, or on the other side of the coin, a flurry of cold weather forcing up U.S. domestic prices will ultimately slam the door shut! Let’s see.