SIMON SAYS: I think the word of the week has to be Fragile!

Submitted by Simon Hill on Sun, 09/13/2020 - 17:00
I think the word of the week has to be Fragile!

You’ve heard and seen the banner headlines, “Six months on, coronavirus victories remain fragile”, “immunity to COVID-19 is fragile and short-lived”, “Global economic growth outlook: Fragile, handle with care”, there’s even a web site called the “Fragile States Index”, check that out @ https://fragilestatesindex.org, they reckon Chile is the “most-worsened” country in this year’s index. By the way that is probably the first time I’ve used that particular hyphened word in my 59 years! But for all of us trying to make sense out of all this stop/start, up/down, maybe/maybe not world, the word fragile certainly epitomizes the whole energy space, and LPG has not been spared from its own shaky undertones.

WTI on 1st September closed at $42.75/ Bbl, and ten days later it’s dropped to under $37.50/ Bbl, yet the global news hasn’t been that dramatic, more uncertainty I grant you, but is it any more than we had two or three weeks ago? The word “demand” has probably been used the most alongside fragility, and they keep adding “growing” in a negative sense. The Saudi’s had surprisingly cut their October prices for oil sales into Asia at the start of the week, then came the unexpected increase in US crude inventories, the first weekly rise for seven weeks, mainly as a result of a big drop in refinery runs as a result of Hurricane Laura, and dare I say it, fears of fragile demand, worsened in the U.S. as the summer driving season is about to end. But, if prices are falling, surely demand will start to increase, especially as the LPG roadshow heads towards the winter, but in the current climate any economic axiom is proving to be a headache rather than a reality. With the UAE apparently over-exporting crude oil last month, maybe also look out for further rumblings about production cuts by OPEC and their allies.

Whatever is the discord in the market, LPG traders, despite outwardly expressing doom and gloom, are still looking for that specific chink of opportunity out there. Deep down the trader has always mistrusted any view that a winter is unlikely to happen, certainly not in mid-September, therefore it’s not surprising that we’re starting to see a few tricks being unravelled from their expensive shirt sleeves. But before you think I’m swaying to the slightly bullish side, forget it. October is a nightmare, with significant discounts still the order of the day. The start of the week saw a bid of just under minus $30/ Mt quickly get snapped-up, but with such a fragile market it always seems to lead to a divergence rather than a convergence of ideas, opinions and deals, pushing worried sellers to grab whatever they could off-market, and that’s meant a couple of even bigger discounts against October FEI, in the $30s/ Mt, getting done. We are also back to single digit premiums above CP for CFR sales based on October CP, and that’s with freight up in the fifties, give or take!

To add to the feeling of glut, a couple of Middle East producers threw a cargo each into the market. A butane heavy FOB cargo was sold, I won’t say it was snapped up at CP minus $20s/ Mt, and there was the producer’s vessel involved as well to muddy the numbers a little, but at least the presence of butane made it more marketable. Another cargo was withdrawn, albeit a full cargo of propane. We’ll wait to see what the Saudi acceptances look like, but don’t be surprised if trader’s end month nominations are brought forward, putting further pressure on Asian receivers, already overflowing with product, in inventory as well as in the process of being delivered or loaded. It’s only a couple of weeks before that ship sat loading in Ras Tanura or Ruwais, comes a knocking at the storage gate! There’s been hope for a better second half October, forget it!

Okay, Formosa were in the market for a very end October delivery, but they didn’t go the hole way and buy a full cargo, and the price, given its location, will still work out to be a hefty discount versus FEI when the extra freight is worked-in. Indonesia have also been in the market for their usual couple of cargoes, but they’re split cargoes, and Pertamina haven’t been visible over in the U.S. trying to buy them FOB, not good on both counts for propane. So where does this leave the trader when it comes to a trusted trick or two up their sleeves. I guess we need to see what’s happening over in Mont Belvieu.

At the start of the week, after Monday’s Labor Day holiday, there was still the lingering chatter going round about cancellations, swaps, delays and cargo reincarnations, but there was a feeling of more life. ARBs had spread-out a little, but I think talk of them hitting the $130s/ Mt was maybe a little exaggerated, and the added discount to FEI, uncertainty of first-half/ second-half variances, plus the physical risk in finding a home, was making life still difficult. And the ship owners weren’t helping matter as rates nudged closer to the $100/ Mt level – again!

But I do think U.S. players are starting to get concerned about the reality of propane stocks approaching 100 million Bbls, with last week’s build of 2.2 MM Bbls resulting in the highest inventory level for 4 years. WTI had bounced on Wednesday but propane didn’t go with it. Also, as surplus Y-grade from 2019 is fractionated it is only getting added to the pot. However, this is not what is inserting a little life to the re-sale fees being paid for cargoes out of the U.S. Gulf, especially in the second half of October. The number of deals are nothing exceptional, but the levels are on the way up, slowly but surely! Vilma were reported to have bought around 5 cents/ gallon for a mid-month loading, maybe they bought a couple of cargoes in the end, and my old colleagues in Athens (although these days they are all very young in comparison) are reported to have paid 5.25 cents/ gallon for an end October cargo. But why? Well remember the trader’s optimism never diminishes, and by lifting at the end of October means you will have a cargo arriving in early December in Asia. Surely by then the storages will have started to reduce as winter demand kicks in, that’s where the money surely can be made for the trader with a degree of foresight. I hope so, but demand is very fragile, well it is for this week anyway!