SIMON SAYS: Happy Christmas and a super-duper New Year!

Submitted by Simon Hill on Sun, 12/22/2019 - 17:00
Happy Christmas and a super-duper New Year!

We’re coming up to the Christmas festivities and the sentiment in the market is extremely robust. Although the physical commotion isn’t anywhere near resembling Oxford Street on Christmas Eve, in itself it’s maybe a hint that there aren’t that many spare cargoes loitering around in the market, especially for delivery in January 2020. What we all want now is a lovely White Christmas, although I think the movie will have to do for this year, and fingers crossed that the extremities of weather we are seeing around the world, especially the heat in Australia, doesn’t show up as prolonged fog along the coast of Texas. That’s unless we’re holding an unsold cargo up our sleeve.

Second half January again took another leap upwards, as far as premiums are concerned. The eastern window continued as the exclusive members club for those with a bidder’s disposition, as both premiums over the Far East Index (FEI) and also fixed numbers, fixed works better when it comes to gauging where CP needs to be set, flew to just below $40/ Mt on the premiums side, and $591/ Mt on the fixed side, both for second half January 2020 delivery. The paper markets are now placing CP January values at between $520/ Mt and $525/ Mt, which will mean a jump in the propane CP of over $80/ Mt, which will mean somebody’s going to make a nice sum of money this year/ early next. Premiums jumped in both Asia and Europe with the January/ February spread on FEI paper standing closer to $45/ Mt, and Europe punching closer to $30/ Mt. The surfing analogy always works well at times like this, you get yourself on the big wave, and you ride it all the way until it breaks, and this LPG market is exactly the same, it will ultimately break! The fun bit is working out when.

If numbers have any meaning, then the ARB is telling us all a very strong story. It’s like cracking the top off a champagne bottle, the top goes flying up in the air, the bubbles slowly follow but the liquid remains trapped in the bottle itself. It’s hard to believe that the differential between the Mont Belvieu and FEI prices, for the month of January, is approaching $300/ Mt, even the underperforming sibling Mont Belvieu/ N.W.E. is close to $200/ Mt. I have to say I am amazed, it’s a real kick in the teeth for U.S. producers, hit all year by takeaway issues, they see pipelines coming on, such as Targa’s Grand Prix, fractionators (finally!) such as Oneok, but the capacity to load and export more cargoes has not responded. This is certainly reminiscent of the loading experiences seen some six years ago, where the cork popped, but the liquid found it difficult escaping the bottle. Here we go again!

Then to top it all, news of January nomination acceptances coming out of Saudi Aramco, and following the OPEC cuts, was not really acceptances at all, more like cancellations, with reports of four cargoes gone, and a 10 per cent tolerance cut for most of those who did end up getting cargoes. No wonder Asia became extremely anxious about supply, it’s a crazy world. There was more than the Club World Cup going on in Qatar, with a full propane cargo loading at the end of January attracting bids at premiums just below $10/ Mt, while yet another Pertamina tender was released, and yet again wasn’t awarded, and then re-issued, in some belief that the world would change, and suppliers would gain their senses. Pertamina have had such a good run that a little bit of realism, as to the ups and downs of the market, will get them the supplies they need, and when it’s tight, then sometimes you have to get the cheque book out and pay the going rate.

There is maybe a release valve on the horizon that might, or might not, start to slow down the frenzied rise in premiums, and the underlying Saudi Aramco CP values that back them up. With propane jumping up to naphtha values, we should see both the steam crackers, and the propane dehydrogenation (PDH) plants, start to ease back, potentially freeing up volumes into the market, at least for the winter. Some are saying IMO 2020 will cause a deluge of naphtha to hit the Asian markets, due to the reconfiguration of the refinery slates, so maybe we shouldn’t be relying on the petrochemical market for continued support in the year ahead.

In Europe the market has also gone into bid mode, as U.S. cargoes are being re-directed to the stronger Asian market, and there are signs of exports from the North Sea and Russia starting to be talked as potentially doable. But again, with the propane/ naphtha spread coming in, as a result of LPG overpowering its bigger cousin naphtha, there might be a lid that can be applied at some stage. However, the combination of both U.S. and Middle East supplies is not a bearish sign at all. As I look out of my window, I see some sunshine and mild temperatures, which will at least keep any short-term supply and price Armageddon firmly in the distance.

Given the widening of the ARB, the “drag-up” effect of the strong Asian prices has been minimal, even with crude oil enjoying a small bull run last week. What it has also meant is that propane to crude oil ratios have slipped back down again, to below the mid 30% levels. Producers not only face bottlenecks getting LPG out of the country, but within the U.S., the weather is not helping, with averages at best normal for this time of the year. There was even talk of cracker demand slipping, again not good news for the U.S. market’s supply side. At least the EIA weekly stock numbers saw a draw of 2.5 million Bbls, but it was overshadowed by concerns that higher production is struggling to find markets at home or abroad.

The scarcity of offers for export from U.S. Gulf terminals is a mix of new slot scarcity and re-sellers, constrained by system requirements, from offering, or they are just waiting. I don’t think though that there are too many waiting, this is the time of temptation and who can resist premiums of over 22 cents/ gallon! The netback is 30 cents/ gallon, but it’s not prizing out any more new volumes, that’s the worry. So if you are heading into Christmas with gaps in your receiving programme, hopefully Santa will prevail, and deliver what you need. If you have spare cargo, it’s time to just sit back and enjoy one of those markets we love dreaming about. Who says dreams never come true!

I have also decided to sit-back a little and enjoy the festive cheer myself, as the market starts to quieten down for the Christmas and New Year period, exacerbated by cargo programmes being put to bed early this year. Therefore I’m not going to produce a new SIMON SAYs until the “epiphany” on 6th January, I do like trying to get my tongue and teeth in the right place to say that word! It’ll give you chance to read all the old SIMON SAYs you missed. I’m also going to re-assess how best to move forward. This period was supposed to be only for a few people to give me feedback as to how the blog was developing, but amazingly it has grown to nearly 600 readers, and I’m sure it could be bigger with a bit of a push. But I need to think. In the meantime we will also put on hold the Trade Secret report, as we want to change it a little, may be incorporating some information in a re-vamped RBN report. Anyway I will let you know more later. In the meantime please enjoy a wonderful Christmas and a super New Year, with peace on earth, Trump in the Senate and Boris in #10! There we go!