SIMON SAYS: I told you so!

Submitted by Simon Hill on Sun, 12/15/2019 - 05:00
I told you so!

I think what has characterized the world I live in over the last week, as well as the LPG market itself, has been a number of surprises, and how situations we have been talking about for weeks and months, now look as if they have come true, beyond any reasonable doubt. We are waking up to a new set of parameters, that will make the next two or three months interesting, if not a lot more predictable. Here in the U.K. most of the country were surprised, in fact very surprised, to see Boris Johnson, and the Conservative Party, storm to victory by such a huge majority. But we knew the key issue, however much politicians tried to deviate the course of the debate to other areas of government policy, and that was BREXIT. Whether we are in or out, the key marginals, and a few more that we thought were not as borderline, needed less than a 10% swing overall to move from staunch Labour (socialist) to Tory (conservative). My grandfather was a miner in Bolsover, a town situated in the north of England, who lost their Labour MP Dennis Skinner, better known as the “Beast of Bolsover”, an MP that had sat in the House of Commons for over 40 years. My grandfather would have turned in his grave if he ever thought such a result would ever take place. The result is clear, a majority government with a clear BREXIT message is taking the U.K. out of the European Union on the 31st January 2020. Happy Christmas!

Likewise, what has been a key issue over the last few months, and for me is the main cause of the shock that hit the LPG market last week, is the meagre increases in LPG export volumes out of the U.S. Gulf. I spoke about it last week in SIMON SAYS, that the updates and announcements made last summer by the four big U.S. Gulf exporters, of a circa 25% volume increase in export capacity, would make anyone feel that more exports would flow. It was also at a time when a handful of companies in the U.S. were in the decision making process of whether they needed to have an export facility of their own, to complement the huge investments they have made in the midstream NGL business. There were  other companies trying to find alternative export routes, tied in to a dock, storage and pipeline systems already in place for other products, but not on the magnitude of the current LPG exporters. In addition, they were keen to look at other loading locations along the Texas coastline.

The key message for me, is that the words have worked far better than the export reality, as measured by extra cargoes being loaded. Enterprise were talking to the market of five extra cargoes in September 2019, moving up to ten cargoes extra early in the fourth quarter. Targa had invested in upgrading their butane loading capacity at Galena Park, and the belief was that this would enable, not only more butane to be exported but also create the odd gap in the lifting programme, and maybe the market would see an extra couple of VLGC cargoes loaded each month. Energy Transfer still had there hands held by the nomination procedures encapsulated in their main long term export contract with Shell out of Nederland. Now P66 I feel have been more straight forward, they’ve managed to squeeze out a couple of extra cargoes per month, and have been happy to market them, while also working on further capacity improvements later in 2020.

To me the words, the actions, the expectations, would add up to 15 more VLGC cargoes that could be loaded in the fourth quarter this year and exported from the U.S. Gulf; note, we only have a couple of weeks left of this quarter to enjoy. Assuming 15 cargoes of 575,000 Bbls by volume, or 46,000 Mt by weight, my abacus makes that over 8.5 MM Bbls a month and around 285 M Bbls/ d. The monthly EIA statistics post April 2019, when Marcus Hook exports kicked in following the opening of the Mariner East 2 pipeline serving the shale developments up in Marcellus and Utica, showed that propane exports were pretty consistent around the 1,100 M Bbls/d mark through to the end of September 2019 (see here). We’ve had 10 weeks of propane export numbers since, and although extremely erratic the average is only 1,200 M Bbls/d.

The level is certainly higher, but we would expect to see this for the winter market as demand in Asia starts to flip to propane, while the southern hemisphere market, especially in South America, moves into summer mode, and is therefore less dependent on higher butane cargoes; i.e., cargo splits more heavily weighted to propane. Some will also say, look at the weeks ending on the 15th and 22nd of November this year, where the exports were over 1,300 M Bbls/d, but anyway there were 6 weeks in April and May averaging 1,300 M Bbls/d, albeit heavily influenced by the rush of exports out of Marcus Hook, but we did also see two weeks of over 1,250 M Bbls/d in July. So come on, the capacity to hit 1,300 M Bbls/d was already there, and it was only the propane/  butane splits that skewed numbers. Last week’s 1,538 M Bbls/d of propane exports appears at first sight to be “Thanksgiving” related, as the last two weeks spanned the holiday. Given that the week before was only 839 M Bbls/d, I think we can all average it out at 1,200 M Bbls/d. Now I’ve been expecting 1,400 M Bbls/d consistently over the last quarter of 2019, increasing to 1,500 M Bbls/d given the move towards propane at this time of the year, but I just haven’t seen it. Maybe you have?

I’ve also looked for evidence with what’s happening in the international market, the January 2020 paper ARB is around $225/ Mt, moving wider by nearly $20/ Mt over the course of the week. Asian prices have moved up strongly, market structure in Asia is sturdier, and the U.S. propane market is relatively weaker, when compared to both Asian levels and also to WTI. The simple fact is that there isn’t an overhang of cargoes in the Asian market, they just haven’t appeared in the magnitudes some players had predicted, and what we might have inferred from the U.S. export capacity expectation. This makes the market stronger. At the same time in the U.S., for propane prices to accelerate at a faster rate than crude oil, Mont Belvieu needs to see not just record propane exports, but exports that reflect the capacity increases that were supposed to be in place, but are clearly not. So the market is weaker. If export capacity was there, terminal fees would be lower and freight levels from Houston to Chiba would be much higher, but they aren’t. Spot terminal fees could well over take freight levels in the next few weeks, who would ever had predicted that!

Tomorrow I will look more closely at the ARB, the netbacks in the U.S. Gulf, the re-sale market and the lack of cargoes for ships, which are starting to dent the recent strength in the freight market. We might have had a couple of surprises this week, but we knew it would be caused by BREXIT on the one hand, and a lack of extra export slots on the other.