SIMON SAYS: Is the LPG market simply going to follow the path of crude oil?

Submitted by Simon Hill on Sun, 07/26/2020 - 17:00
Is the LPG market simply going to follow the path of crude oil?

It’s funny looking at the relationship between the antics of the crude oil market and the movement in LPG. One always seems to be following the other, but the timing appears to be out of kilter, but why? I know LPG players didn’t fall into the trap of the massive drop in WTI, heading negative in a technical “who’s left holding the baby” scenario, nor the resultant cataclysmic production forecasts, especially in the U.S., that were being rushed out as a result. In addition the U.S. driving season was hyped, but has pretty much been a damp squib so far, and then OPEC+ have changed their tune and attitude, dropping production too slowly, after demand had already bolted, but are now stuttering when it comes to production increases, as we regain a lot of the lost ground.

However, along the recent LPG/crude oil timeline, LPG jumped-up in price when set against crude oil in the early days of COVID-19, as crude oil prices slipped at a rate of speed, stemming from the crash in refinery running rates, then demand for crude oil started to rejuvenate as Asia appeared to be over the worse on the coronavirus front, Europe was not too far behind it, and the U.S. just kept talking about not stopping their economy, although it seems they are now paying a heavy cost for it. The price of crude oil jumped back to $40/ Bbl and higher, for both WTI and Brent. But then LPG found it difficult to keep pace, the Indian demand faded after an initial upsurge, and Asian importers were facing high stock levels and hesitant demand offtake. Suddenly the propane/naphtha relationship went negative again, and the relatively dormant petrochemical feedstock demand started to look-up. While market fears centered on dramatic export cuts out of the Middle East, and the potential for cancellations galore out of the U.S., demand was simply not there, especially to stir-up the price of LPG against its big brother crude oil. As crude oil kept moving up, LPG struggled to keep pace, and the front of the LPG curve went further into negative territory. Cutbacks maybe in the Middle East, but if you saw the number of available spot cargoes, you’d have thought the opposite was the case.

Last week I was seeing a degree of strengthening taking place in the market, with players having surprisingly woken up to the new norm, that OPEC+ were starting to turn the tap on again, however slowly this increased flow is turning out to be, that production figures in the U.S. were surprisingly buoyant, despite the cries of doom in the shale patch, and a continuous negativity in rig count numbers. But neither appeared to be matching the demand for cargo from both traders and importers in Asia. The “buy” button appeared to have been pressed, and we felt we were entering at least something of a bull run.

I think it’s important to explain what I mean by waking-up, a term I ask my wife every morning around 11 am with the pre-words “are the boys…….yet?”. Let’s face it, the coronavirus brought a new form of working, as offices and trading desks were abandoned, and kitchen tables and sofas became populated by the archetypal apparition that we generally believe the LPG trader looks and behaves like. But now the market has got into the swing, spending more time back in the office for some, but communication has started to increase, and with it the number of deals getting done. Still not back to the liquidity of pre-COVID-19, but it’s getting there, especially with three or four new players starting out in the pseudo physical Ginga and ToTs markets, as well as position-taking in the recovering paper arena. Markets certainly need momentum, and this might be one of a number of reasons why normally a quiet August suddenly sprang into life.

The evidence was visible in what people were prepared to wager on CP, in horse racing terms the “Grand National” of flutters! It raced-up to nearly $400/ Mt as we approached the last week before the new August price would be set. The August FEI market had been reeled-in from mid-to-high teen negativity a couple of weeks ago, to pretty much flat by mid-week. Then suddenly players realised they had just about caught up with the crude oil market’s advances of recent weeks, buyers stepped back into their kitchen domains, as they saw an easing of concerns, not just for the supply source cargoes, but more importantly the physical arrival timings in Asia, especially in the second half of August. It looked more and more the case that sellers were outnumbering buyers, and as with the crude oil market, players took their foot off the gas. Trades of the 23,000 Mt Ginga propane cargoes for second half August, started to head back into negative territory, quickly to minus $5/ Mt, but even closer to minus $10/ Mt by the end of the week. A Kuwaiti FOB cargo found little interest from potential buyers when initially offered in the market, and had to be repackaged on a delivered basis to find a buyer. So the normal rush-up in August CP paper levels suddenly hit reverse, and expectations of $400/ Mt plus at the start of the week had dropped to a reality of sub $370/ Mt by Friday.

But, while the product market turned south, the freight market kept on heading north, as charterer’s requirements continued to enter the market, while the recent attempts to take vessel supply away, such as slow steaming, routing around the Cape, or early dry-docking, meant that the market was unable to quickly react to the demand. Add in the discharge delays in India and in other coronavirus hit countries, and charterers quickly realised that hitting loading dates was going to be harder than guaranteeing train arrival times. This resulted in a rush to find ships with arrival dates that looked tangible, there weren’t many, and hey presto Baltic had jumped to not far off $50/ Mt, and the U.S. to Asia freight level had vaulted back into the low $80s/ Mt, with the equivalent time charter rates exceeding the million dollar mark. As we look forward it appears that the first half of September will not bring relief to the charterer as VLGC availability again looks tight, also with ships stuck in the east of the country, the Indian importers are looking at spot tonnage replacements, and with the spectacle of WC Africa cargoes, there’s smiles again on the ship owner’s faces as they sip the odd glass of bubbly on board their yachts in the Mediterranean, or should I say super yachts. Ok, I know the days of Mr Onassis on his yacht have gone, but sometimes you have to fantasize, don’t you?