SIMON SAYS: Is it the wool being pulled over our eyes, or is it just the fog?

Submitted by Simon Hill on Sun, 01/19/2020 - 17:00
Is it the wool being pulled over our eyes, or is it just the fog?

When last week’s market looked as if it had had enough of just heading-up in one direction only, it usually would mean heading the other way faster than you would expect, but hold on, within just a week this doesn’t now appear to be the case, and market actions are pushing in all different directions, meaning you just have to love the world of LPG! To quote an English saying, I get the feeling it’s time to make hay while the sun shines. We seem to be in a classical “now” scenario, with prices and ARBs at the front of the curve enabling deals to happen, but as we look forward into late March and beyond the tide starts to turn. The key will be to not get caught out!

In the meantime the market is also trying to assess short term dynamism with long term doubts. Yes, there appears to be medium term optimism associated with the Phase 1 trade agreement made between the U.S. and China, in what still is likely to be a long drawn out negotiation. But it’s a start, although how U.S. LPG imports into China will be treated is yet to be announced, and we’ve also had disappointing economic numbers coming out of China, maybe acting as a catalyst from the Chinese side for the coming together of the two nations. China’s GDP expanded by 6.1% in 2019, which is the weakest we’ve seen since 1990. China needs to see a positive outcome to the trade negotiations, or we could observe a continued deceleration of their economy. I’ve got a sneaky feeling this news will bring a wry smile to the President’s face as he prepares for his next big TV hit following “The Apprentice”, set on Capitol Hill!

Also in the U.S. there continues to be big questions being asked of the future production levels in the shale mega regions, especially in the Permian Basin, where the explosive production growth in the latter half of the last decade, where volumes have tripled since 2015, might start to peak far earlier than anyone had ever imagined, with the potential contraction being steeper than anticipated.  Adam Waterous, a fund boss in the sector at the Waterous Energy Fund, suggested last week that 2020 was going to be the peak in the Permian. The apparent negativity that is gathering pace, is not only the “Greta” factor, which has certainly increased as fires burned so aggressively in Australia, but it’s also the same concerns about the investor’s reluctance to pour good money after bad, especially given a decade of financial underperformance, with negative cash flows and insufficient returns on investment. While the President can boast that the U.S. currently produces more energy than it consumes, the financial reality at the well-head is not quite as rosy! I’m afraid you “pays your money you takes your choice” as far as the call on shale. Without doubt there are more pessimists than optimists, but I still feel we are talking about a decline in the growth, rather than a production peak followed by a drop. Any drop will need crude oil prices taking a tumble to nearer $40/ bbl for WTI, and for that to happen Iran will need to dramatically weaken from within, which I don’t see happening any time soon.

In the meantime all eyes have been focused on the Texas coastline, and focus is an apt word. I’m not talking about the shady goings on with the Houston Astros baseball team, or the loss of the Texans in the play-offs leading up to the Super Bowl, nor the disappointing season so far for the Houston Rockets and their dream partnership of Harden and Westbrook. I’m talking fog and the unfortunate collision of the Odfjell chemical tanker “Ben Fortune” and an 80 foot fishing boat, causing the fishing boat to capsize, the unfortunate loss of life, and the temporary closure of the Houston Ship Channel. It’s certainly been a disruptive week all round. What it has also meant is a significant weekly reduction in ships getting loaded with LPG in a number of U.S. Gulf coast terminals. There may well be catch-up, once the fog lifts, but at this time of the year the fog comes and goes. What it has done is increase freight levels beyond the $135/ Mt mark, as fixtures keep on coming and the next available ship isn’t showing open until the back end of February. In addition the Baltic is recovering, holding in the low $70s/ Mt, but it’s the western premium that’s getting most of the attention. There’s the feeling that a few weeks of “stop/start” in the loading and sailing conveyer belt, that forms the hub of U.S. LPG exports, will lead to delays in ships finding their way back to load after performing their current voyages, and with higher bunker costs there will need to be an incentive for owners to up the throttle. Add to it the delays that continue transiting the Panama Canal due to low water levels, dry dock schedules for the expanded 2015 fleet and scrubber retro-fitting, as well as a degree of dampened optimism returning to the Middle East, with less severe disruption to the main producer’s February loading acceptances. So although there is downward pressure on the Houston to Chiba ARB levels, as we hit the post winter period, it doesn’t look as if the ship owners are willing to take the slack.

As the market digested the weekly U.S. propane stock numbers released by the EIA on Wednesday, the concern still remains with physically getting the volumes to move out of the export terminals. Expansions in capacity have been slow in taking shape, although there are signs of faster loading rates, but the fog is making life very difficult. Most are anticipating exports will have a poor week, potentially struggling to hit half of last week’s 1.235 million Bbls/ d. So brace yourself for a significant build on Wednesday, at a time when the market should traditionally be scrambling for propane barrels. Whatever the prognosis is regarding future U.S. shale production levels, the market still needs export volumes and export capacity. With Enterprise’s non-TET propane barrels underperforming LST and Targa, it’s maybe a sign that with lower exports and Enterprise’s new fractionator starting to clear some of the Y-grade Bbls, there’s less demand for finished propane Bbls in the Enterprise system.

The Asian market red zone appears to be easing down, with inventories looking as if they are ample enough to cover the rest of the winter season, and the news of less severe delays and fewer cargo cancellations in the February programmes in the Middle East is bring relief to buyers, although the February programmes tend to be less populated with cargoes, as the quarterly lifters are inclined to push for January slots. Chinese buyers are also buoyed, not only by the recent news of the Phase 1 trade tariff agreement with the U.S., but also more propane appearing in the Middle East as single cargoes or as part of split loadings. The premiums are still there, but it is winter, and they are not anywhere near the levels we were seeing a few weeks ago, or feared we would be seeing throughout January.

Is it time to maybe relax again, well not so quickly, the fog and delays in Houston and the Panama Canal holdups could well prolong the supply question? There must be some realignment in the next few weeks, but the controlling factor will be the level of U.S. exports, and not until we see 1.4 – 1.5 million Bbls/d showing up consistently in the weekly EIA numbers will I believe capacity has been expanded, and that we haven’t had the wool, let alone the fog, drawn over our eyes!