A momentous week without doubt, not just in and around the Capitol building, but beyond and across a very tired and anxious world. There was still talk globally of polar vortexes, while US politics suddenly became that of polar opposites. The COVID pendulum swung again, as the roll-out of vaccines became a concern, while the number of cases, and especially deaths, darkened the light of hope at the end of the tunnel, seemingly pushing it further into 2021. After politics and the pandemic, the third “P”, Propane, also decided it was time to continue changing course, and came back down further to earth, literally, with no sustainable bump appearing to be in sight! Well, at least Tom Hanks was a great advert for upping the dial on U.S. propane heaters, as he stood shivering more than just his timbers, delivering a rousing speech in front of the Lincoln Memorial!
But the third week in January is supposed to be one of the quietest, and most humdrum weeks of the year. But not seemingly this particular week, and definitely not in the LPG world! Volatility dominated, liquidity dropped, and stop/ loss controls swung into action. Last week’s “Simon Says” had seen the writing was on the wall, for an ARB that was still confidently trading above $200/ Mt for February only just two weeks ago. But at the close of play this week the ARB between the U.S. and Asia was struggling to hold much above $140/ Mt. Cash differentials had also taken a significant cut, falling from the mid $50s for a February/ March or March/ April FEI spread, to closer to $30/ Mt, still backwardated, still a premium, but not expected.
LPG traders are used to the seasonal impact of the “cliff”, however painful it might be, but a few ended the week questioning whether it was really the time to start stoking up the LPG furnaces of what traditionally have been the buyers of last resort, the petrochemical steam crackers. Hadn’t enough fat been taken out of the market already? Certainly, it was time to take a breather, a lot was happening, and still a significant indicator, the EIA inventory numbers, were not due to be released until near to London’s Friday close, the same time as traders would be sneaking a couple of beers or a glass of wine out of the fridge!
A number of traders had been checking out the stable crude and product prices over the week, while seeing the “wrongs” of a very strong winter propane market starting to be put “right”. Last week we were struggling to spot any margins at all for the Chinese PDH plants, with PDH buyers subsequently retreating from the market. Chinese importers were also put-off from buying further imports, as delivered costs had moved above their own domestic LPG price levels. Demand was being withdrawn from the market. But as propane and butane prices quickly dropped in Asia, other significant prices pretty much held their own, including naphtha, ethylene and propylene. Suddenly PDH margins jumped to over $125/ Mt, while PDH buyers with tenders in the market last week chose to award more than just the one cargo. In the meantime the attractiveness of propane and butane, as the feedstock of choice for the ethylene crackers, increased to near parity with naphtha, so maybe we could see furnaces stoked-up after all. As a result, the cargo overhang in the market appears to have greatly reduced over the week, again bringing hope of a floor, and as the supply/ demand balance comes closer together for spot February activity in Asia, the attention will now start to focus on the two main global supply sources, namely the U.S. and the Middle East!
In the Middle East, both rumour and reality pointed to up to 5 Saudi Aramco contract cargo cancellations in February, and the same again likely in March, as the impact of the 1 MM Bbls/d cut in crude oil production starts to bite. Indian buyers appear to have come out of it unscathed, probably to help move unwanted butane, as limited buying in the rest of the market was pushing butane values $40/ Mt below propane. CP paper pricing was bolstered by the cancellation news, but the Asian market didn’t appear to wobble at all, evidently more concerned with the prompt cargo over hang and the approaching end to the winter season. I would be ecstatic knowing I wasn’t likely to get an overpriced CP cargo, with a couple of tanks of that dreaded butane, and I could instead drive a bargain on all those FEI priced cargoes overhanging the market, with premiums dropping. Did I hear February FEI + $10ish/ Mt had been done for a cargo arriving in that same month? But there will be a time where these cut-backs start to have an impact, just wait.
There was a degree of hope by mid-week in the U.S., to some of course despair, that despite WTI showing a small increase, an 8% drop in propane values would likely keep ARB doors just about open. May be it was a reaction to potential cuts in exports, or seasonal fog along the Houston Ship Channel, but it didn’t last for long. Maybe the wait for EIA numbers was playing hard on people’s minds, as the wise of inventory forecasting were hinting at a huge draw, not just around 4 MM Bbls, but may be even as high as 6 MM Bbls! As Asian cash differentials began to slip, the ARB door theoretically closed with the key firmly turned. But when is a door not a door, and when is a cancellation not a cancellation? As export terminal capacity has increased over the last couple of years, so has their flexibility in allowing customers more time to decide on whether to cancel. Maybe competition is working!
So the list makers had only managed to write-in 4 cancellations, but had a whole long catalogue of “maybe’s”. Even with freight levels crumbling, netbacks were clearly sub cancellation level. Yes, re-sellers were hoping for demand to re-ignite, and freight rates to keep falling faster than the ARB, but every time one part of the market moved it only opened a Pandora’s box of other issues, dampening enthusiasm to get deals done. Northbound delays at the Panama Canal were in the double digit days, and southbound concerns were still there for un-booked transit, making late arrival in Asia and the fear of the backwardated market real. Same applies for fog, yes it might push Asian buyers to re-ignite their concerns about cargo arrival delays, but that time has passed, demand in Asia is clearly now a function of price.
So with the end-week EIA inventory numbers revealing a 6.2 MM barrel drop in propane stocks, 25% less than this time last year, and an export number up closer again to 1.5 MM Bbls/d, I wouldn’t get too optimistic about the ARB re-opening any time soon. And that’s not good news for ship owners, as trader re-lets will continue to have the greatest impact on freight numbers, and there’s still a long way they could fall. I might be going a little “gaga” in my old age, but any new equilibrium in the weeks to come will be determined by price, not rumour, nor sentiment.