SIMON SAYS: Houston, you’ve had a problem!

Submitted by Simon Hill on Sun, 02/21/2021 - 17:00
Houston, you’ve had a problem!

In years gone-by the U.S. winter would normally have run out of steam by mid-January, or maybe I should say snow, driving cold weather over the Atlantic to Europe for a few pre-spring surprises, and of course a potential jump in LPG prices. So not only are we past mid-February, but even the southern state of Texas ended-up getting a burst of the current U.S. cold snap, engulfed by a huge snowstorm, and below zero temperatures, that started last weekend. The infrastructure buckled, power was lost, water was cut-off, people were put at serious risk. At the same time the oil, gas, refining, storage, fractionation, pipeline, export systems, shipping channels, petrochemical plants, and those wind turbines were closed. Without doubt the “Texas Freeze” has turned energy markets upside down, natgas prices jumping-up out of their skins, as did propane prices in Conway, hitting nearly $1.50 per gallon at one stage, while Mont Belvieu swirled above $1 per gallon for the first time in a long while. It does look as if the weather extremities will have passed through Texas by the time you read this, but what will the knock-on effect be on the LPG world, a ripple or a large icy wave?

Certainly, there’s been some impact on U.S. crude oil and natgas production this week, most notably in Texas itself, with wellheads and valves galore freezing. Numbers vary, but losses of around 20 million barrels of crude won’t be too far off the mark. In addition several refineries were shut for differing periods, mainly resulting from the power outages, and suggestions that 3-5 MM Bbls/d could have also been lost, around 20-25% of total U.S. refinery capacity. Both of these factors will impact the EIA propane production report numbers for the week ending 19th February, especially as fractionators were also sidelined during parts of the week, and their output will impact numbers even more than what’s been happening up in the Permian and beyond. My estimate would put the figure sub 2 MM Bbls/d on average this week.

On the demand side the impact of the cold blast will surely drive the product supplied (implied demand) number up, especially as the cold weather mainly effects the top half of the country, even allowing for some demand offset resulting from the temporary closure of Gulf Coast petrochemical facilities, including those that would have been cracking propane. Don’t be surprised to see a number above 2.5 MM Bbls/d, a potential weekly record.

And then there’s the exports from the four main terminals, all impacted during the week, albeit to different degrees, by either closure of the Houston Ship Channel, power loss, chiller glitches, equipment seizing-up, or just a lack of operational personnel being able to get to work. Okay it was always going to be short-lived, but it’s been enough to cause at least a 5 day back-up. It’s unlikely that the terminals were able to start catching-up before the EIA’s shut-off time on Friday night, so expect exports to be significantly down this week, may be below 800 M Bbls/d, half the figure of a few weeks ago. With these loading days lost it’s unlikely that we’ll see the export terminals be able to offer many new slots in the first decade of March. There’s even talk of more fog next week just to make things worse. But one thing we’ve learnt over recent years, the ability to catch-up is there, and has been further enhanced by terminal capacity improvements in recent months.

This last week’s EIA inventory numbers came out as pretty much expected, decreasing 2.9 MM Bbls, but the market was dragged-up as much by the price in the mid-west, out of Conway, than the distraction of Arctic events happening in Texas. Prices in Mont Belvieu had hit $1 per gallon by Thursday, but with the weather improving by the weekend, not just in Texas, a slow melt was on the cards. Of course the U.S. market is only one end of the ARB calculation, but it was clear that this week was not going to be an encouraging one for March propane exports!

While all the focus of attention was on the U.S., Texas in particular, Asia was in the meantime waiting for the return of Chinese buyers after their New Year celebrations, but this didn’t stop the Ginga window getting bid-up, as a couple of short players pushed prices through value. Not that many days until CP! The lack of end-user demand, especially in China, only brought uncertainty by end-week as to whether this strength in cash premiums could be sustained. There is this dichotomy of views on the Asian market. One side of the argument fears further cargo delays in addition to export cutbacks, as second half March arrival cargoes out of the U.S. will struggle to meet their contractual window, this being on top of already confirmed cancellations in the U.S., and reductions in Saudi LPG exports in early March, with no Aramco cargoes programmed in the first decade. When did that last occur? The other side of the argument sees shrinking PDH margins, and low domestic Chinese prices, limiting the appetite of Chinese buyers on their return, as well as stressing the significant decrease in Panama Canal transit delays, cut to only 1-3 days versus the ten+ of a few weeks ago, and was offsetting the loading interruptions in Houston. And dare I say it, more cargoes to China from Iran? The end result was that LPG prices, that had been pushing higher for the last three weeks in Asia, suddenly stopped keeping pace with the rise in Brent., in fact by the mid part of the week they were starting to drop, as Brent continued to rise before easing on Friday. Pressure’s been coming on the ARB from both sides, and in a topsy turvy week even April ARB values had shrunk below $100/ Mt!

I personally think we are at a low point regarding supply, and I don’t see it lasting more than a few weeks, especially with the hint of more Saudi crude oil production from April, and a U.S. market that will struggle without exports, just after the fear of there being too many. The March programme out of the U.S. will start to pick-up soon, trust me, but will it be in time to save ship owners and disponent owners from the dreaded words “sub OPEX”, where freight income stops meeting operating expenses, and that’s if you’re able to find employment in the first place. Both in the Middle East and U.S. Gulf we’re seeing the “open ships” list grow, and that other feared word in the timing column - “prompt” - is just about to appear. The expansive VLGC dry-dock programme will be advanced for sure, the odd ship owner will continue to trade, others slow steam, swap early ships for later ships, but without cargoes it’s a futile battle. Baltic premiums have gone, trader re-lets sit side by side with ship owner’s vessels, and they’ve just told investors how good the fourth quarter was. It’s tough times for all, but let’s be optimistic, it might not be for much longer!