SIMON SAYS: Is there a Cold Wind Sweeping through the Market?

Submitted by Simon Hill on Sun, 09/27/2020 - 17:00
Is there a Cold Wind Sweeping through the Market?

If you are one of those players in the LPG market who still believes in changing seasons, and the belief that Winter demand in the northern hemisphere is part of a yearly pilgrimage, one that should have already begun, and ultimately becomes the knight in shining armour for all of those who have loaded-up with cargoes, then please read on. It will certainly make a lot more sense for you than it did for me. As I alluded to last week, we all tend to feel a lot more comfortable in the supply zone than with this big thing out there called demand, but pop the word “winter” in front of it, and suddenly it all seems to add up, figuratively speaking!

I still feel we are having to live with so much uncertainty, particularly with regards coronavirus, its impact on the economy, Trump v Biden, U.S. v China, let alone the implications of a squeeze on future fossil fuel usage. And it shows in the oil markets, as prices continue to display a recurring trading pattern of bouncing around in a relatively restricted range. Monday was a demand ouch! As the sell-off of global equities, coupled with the rally in the U.S. dollar, sent oil prices south. There’s been some recovery back to the deceptive safety of $40/ Bbl, with a few good old supply concerns, mainly triggered by a draw in U.S. crude oil and distillate inventories, together with the remnants of production outages caused by Hurricane Beta passing through. The ups and downs are very narrow, the underlying crude oil market is reluctant to break through these bands that are centered, plus or minus, on $40/ Bbl. But this may not be the case for LPG, where sentiment and reality appear to be on the up!

The key trigger in Asia for FEI tends to be the price of Brent, and LPG fought-off a lot of downward pressure seen in the crude oil marker last week, with comments like “healthy demand sentiment” catching the eye. There was of course a degree of scurrying in the market, as the change in CP at the end of the month gets closer, albeit any likely change appears to be small, and yet more holidays, this time in China, with Golden Week/ National Day celebrations about to begin. However the trading focus has now moved on to the first half of November, and in the minds of those traditionalist’s, this is a month when the weather is going to be somewhat chillier than the previous month, and so on. There was certainly end-use buying interest for November seen in both China and Korea, but tenders issued were either not awarded or reported, which did slightly dampen the bullish tone.

More noteworthy news appeared to be coming out of India, in more ways than one. India is a huge country being ravaged by COVID-19, it might not get the headline news coverage here and in the U.S., as we concentrate on our own attempts to repel the virus, but it’s seriously impacting the demand for refinery products, especially at a time when refining margins are thin. Again Indian refineries are cutting runs, 9% lower in August than in July, operating barely above three-quarters of capacity. September may well get worse. As we saw in April, by lowering domestic refinery operating levels it will result in reduced amounts of locally produced LPG. This comes at a time when the Indian government have completely eliminated the need to subsidize LPG used for cooking, due to the prolonged global fall in oil prices. They are still crediting the accounts of the poorer members of the community, but importers should be able to gauge forward requirements without the need to get government direction or wait for the subsidy monies to filter through the system.

That said, India increased LPG imports by nearly 25% in August, after a few months of decline. It appears inventory is being drawn down, usage is holding up, and the easing of port congestion allows importers to re-enter the international market. With subsidized and non-subsidized prices about the same, there’s a feeling that demand overall could benefit. IOC were the first to hit the market with purchase tenders, looking for a couple of split propane and butane cargoes for delivery towards the second half of November into the eastern seaboard. Next into the market was Bharat Petroleum, this time into the west coast, but again for delivery in November. The tender was awarded for one cargo, but back came Bharat Petroleum with another two requirements in the same final 3 week period in November. Sometimes we have to be careful how to interpret shifts in Indian demand, as they tend to arrive and then disappear for all sorts of reasons, but this looks to be driven by local market economics in relation to global numbers, as well as domestic supply factors, and all of these might well continue, especially as the monsoon rains recede in the northern part of India. We can’t really call this “winter demand” in its purist form, but it does exert increased pressure on other north Asian receivers not to count-on spot supplies, apparently abundant in recent weeks, reappearing at their doorstep in November.

With OPEC signaling 101% conformity to production cuts in August, give or take a few murmurings of increased exports, especially out of Iraq, then a Kuwaiti “now you see it, now you don’t” split LPG cargo in the last decade of October, and an overall slowdown in spot Middle Eastern availability, it’s hard to see any improvement in demand being easily met with cargoes out of the region. The market has recognized this, and the Ginga window saw bids standing alone by the end of the week, already close to nearly minus $5/ Mt, from levels up in the minus teens on Monday and Tuesday. Europe’s window also saw bids outnumbering offers, albeit at levels still with a minus attached.

The winter sages started to look again at the stuttering U.S. market, and with weekly EIA propane inventory numbers coming out slightly above expectation at a 1.7 MM Bbl build, coupled with WTI weakness impacting the Mont Belvieu complex, and firm sentiments in Asia, hey presto, the front of the ARB curve expanded from around $115/ Mt on Monday to nearly $130/ Mt by Friday. The ARB was officially, well let’s say unofficially, looking wide open, both to Asia and also Europe.

But, as is always the case, the sniff of more money on the table means the hawks in the market adjust their prices upwards, it’s only natural. Re-sellers and exporters at the end of October, and also into November, hiked their numbers to levels beginning with a six, a split cargo had already been fixed in the mid 5 cents/ gallon level and was destined for Europe, but this figure was unlikely to be repeated. Shipping enquiries also came back to life, and charterers’ attempts to squeeze numbers below $90/ Mt saw the rug pulled from under them, as rates firmed back-up to the mid-$90s/ Mt, with ship owners countering with bullish arguments centered around vessels getting delayed discharging in Asia, waits of 5 or 6 days transiting the Panama Canal, and the knock-on effect of the hurricane in the Gulf of Mexico. Now, this may have been hyped up a little, and normal service is due to resume shortly, but you have to hand it to the ship owners, they were certainly quick off the mark, showing their ambitions to get a return to the three figure freight numbers enjoyed in the recent past.  

So, has the up and down trend in the LPG market been broken? Has the expectation of winter demand around the corner drawn first blood in the battle between sellers and buyers? If you’re loading at the end of October in the U.S., and with all these delays, real or not, you’ll be lucky to get to northern Asia much before Christmas, well okay a few days before!