In yesterday’s SIMON SAYS I explored what was happening with the capacity expansion at Enterprise’s Houston Ship Channel facility. It’s a bit like Brexit, where we were given a date on which we would leave the European Union, but we still don’t know if it’s going to happen, and if it is, then when? I was skeptical of Brexit when I left the U.K., and I have to say I felt the same last week when I left the 26th Annual Petrochemical Feedstock Association of the Americas, in Lake Charles, Louisiana. But we were told in Lake Charles by Enterprise that the expansion work had been completed the week before, so we have to believe it, don’t we? By the way, President Trump spoke at the same venue the following night, and he was telling everyone it certainly didn’t happen, while everyone else seems to be saying it did! That’s the Ukraine telephone conversation by the way, not the Enterprise dock. It looks like “Dock” could well be the buzz word in politics and along the Houston Ship Channel in the next few weeks!
Now the optimist within me is saying it’s cold at the moment, propane is being mobilized from secondary to tertiary storages in the consuming areas of the north east U.S., while production from fractionators is struggling to keep pace, and although Y-grade production still appears to be growing, we are hearing a lot of negative financial news and commentary, regarding shale production companies, especially in light of the stampede out of fossil, and into environmentally friendly stocks. Then we have propane overtaking normal butane, as the current petrochemical feedstock favourite, and that must surely rev-up consumption, even 50,000 Bbls/d would be happily accepted by the market’s emerging bulls.
So, if the news from Enterprise is correct, and we are going to see more exports, then I’m getting bullish too! But it takes two to tango, and exports have to also fit in with the world demand and supply scenarios. It’s no good if prices go up in the U.S., and not in the rest of the world, especially Asia, if so, all that happens is that the ARB closes, and we get back to square one. However, in today’s environment it might be thumbs up for prices to increase in tandem. Not great news for the ARB, especially if it is to keep pushing through the current $200/ Mt level, but don’t bet against it. The scrubber fitment window is certainly open and it’s taking tonnage away, probably 30 vessels between now and the early part of 2020, at a time when the market needs vessel capacity. That can only push freight rate levels higher, whether it be from Houston, or from Ras Tanura, to Chiba.
You might want to know what’s behind my bullish tone? I think the probable retaliation of Saudi Arabia on one of Iran’s crude ships off Jeddah in the Red Sea, although I must say that what’s exactly happened is not clear, together with President Erdogan’s expansionist ideas becoming reality in northern Syria, can only be bullish sentiment. I very much doubt though that President Trump has the stomach for any altercations involving the U.S. in the Middle East, especially with Iran always lurking in the background, but it might take the spotlight off him in Washington, especially as last week has been one of the worst as President, and there’s probably even worse to come. In addition, on the ground we are not hearing any positive news coming out of Saudi Arabia, that would suggest LPG production is to get back on its feet. I still think we are talking months, and others are of the same opinion too.
Chinese demand appears to be pretty robust, especially impacting the non-U.S. origin cargoes. Premiums in the Middle East are just about there, even though there’s fear that the base CP will get an upward push, as we get closer to November, and it’s always going to be likely, as traders have it pretty much as a default position. But they are also trying to cash-in where they can, and even though we aren’t seeing large volumes from the Middle East producers, there are 3-4 split cargoes that have been brought to light in the market, I won’t go as far to say offered, it’s that sort of market. Even the Chinese are trying to be seen as a seller in early November, to try and stem the market from getting too excited. The big problem though still exists, as the trade war continues. Despite President Trump meeting with Chinese Vice Premier Liu on Friday and announcing that a preliminary trade deal had been “agreed in principle”. But it’s the first tangible achievement in the negotiating process for 18 months, and the toughest issues, that still divide both countries, were left to later talks: China also views the discussions as being constructive. There’s no news yet on any dialogue that might have covered LPG, most likely this would have been done at a lower level of negotiation then the top.
Certainly, we need to keep an eye on trade war negotiations, but more current is the fact that demand in India is still keeping the market tight, especially after the Saudi Aramco LPG export troubles. ADNOC have squeezed out a couple more split propane and butane cargoes for the Indian importers, but some of ADNOC’s other lifters were a little perplexed by this, although nomination acceptances were mostly in line with the dates nominated, but a few were pushed back. One reason is that December CP is in backwardation, and buyers would therefore have nominated dates earlier in November in order to try and load and arrive in the same month There is also a drive from the Indian importers to lift the plus tolerances of their contracts. So even though the news out of Washington and Beijing is positive, the present market is still showing tightness, especially when Indian and Chinese buying interests are brought together. I also picked up that Chinese refinery LPG production was lower than in recent months, while demand was still strong, especially from the recent start-ups of PDH units.
We also had news of naphtha supply cuts out of Saudi Arabia, due most likely to refinery cutbacks associated with the supply impact of the drone attack. This pushed open-spec naphtha prices higher in Asia, dragging up LPG prices with them, both propane and butane. In addition, the Japanese have been looking at buying cargo, and for the first time in a while have had space to buy propane. I believe the outcome of the Typhoon Hagibis might also tighten LPG supplies in the domestic Japanese market. With the bullish tone developing in Asia, traders were therefore becoming more eager to try and cover first half November shorts. And don’t forget Indonesia still has to buy regular cargoes to offset longer term contract shortages.
In our virtual trading office, we’re coming to the conclusion that propane pirces in the U.S. might well start to gain in strength, especially relative to WTI crude oil which appears much less impacted by the Saudi drone attacks and resulting exports issues. Likewise, Asia has not only moved into backwardation, but with the potential strength of CP to propel Asian prices further, ARBS are unlikely to narrow too much, in fact they may even widen further, especially with the freight market still on heat.
So, it’s all looking up for once, but as they say what goes up must come down, hopefully not for a while please, blogs are far easier to write when markets are going up! Oh, by the way good luck my ex-colleague Yuri with your new job in Geneva!