As Thanksgiving holidays approach over in the U.S., we’re experiencing this paradox of having the signs of winter in the midcontinent, stocks dropping over 6 million barrels throughout the U.S. in the last two weeks, but propane exports have just hit a season’s high, with over 1.36 million barrels moving over the docks in the U.S. Gulf, U.S. east and west coasts. Mont Belvieu propane prices have surged on the back of not only the cold weather, but also the hefty export volumes, ending up close to 56 cents/ gallon, while the market was below 40 cents/gallon only 3 months ago, that’s up 40%. During the same time the Mont Belvieu propane to WTI ratio moved from 35% to just above 41%, less than a 20% rise. The key is how all this pricing and stock data is going to influence international LPG movements.
At the start of last week Mont Belvieu was trading at around 53 cents/gallon and a bit, and by the end of the week it was up at 56 cents/ gallon and another bit, slightly gaining pace over crude oil, but feeling stronger given the weather and hefty propane export numbers from the EIA. But when it comes to the ARB it’s all about relative strength, primarily versus the LPG markets in Asia, followed by those in Europe. Yes, there are many factors pulling and pushing the ARB, but the rule of thumb is to sit down with a nice cup of tea every day when the “Ginga” window opens in Singapore, today it’s 1630 local time, 0830 here in London and 0230 in Houston. I can’t imagine anyone is actually awake in Houston at this time of the night, anyway not with a cup of tea in their hand! It’s then a matter of screen watching, maybe even participating in the bids and offers being made, although activity in the window does feel a lot less than usual, and trying to gauge whether the market is stronger or weaker than the last window’s close on Friday. In addition, we are also trying to determine the overall strength of Asian LPG, as players look at the relative robustness or fragility of FEI against Brent crude oil, naphtha and other indicators for the period in question.
On Friday for example, a large Chinese importer was offering second half December cargoes of propane (23,000 Mt lots), and their last offer was at December’s FEI index plus $6/ Mt. Today they have opened with an offer in the window at December FEI plus $4/ Mt, and as I write they are down to plus $3/ Mt. If anything, it shows how up to date SIMON SAYs is, or on the other hand it shows how late I can leave it to write the blog. Anyway, my judgement would be that the front trading period of second half December is slightly down, while there is activity in the first half of January, where one of the traders are pretty much on their own, bidding from January FEI plus $2/ Mt today, they finished at plus $3/ Mt on Friday. The window has just finished, and the Chinese party has ended up dropping their offer to December FEI plus $1/ Mt for second half December, while the trader has kept at January FEI plus $2/ Mt as their best bid for first half January. My feeling is that this is a marginally weaker window, with the backwardation getting flatter. The paper FEI for December, was trading a dollar or so up on Friday’s close at around $475/ Mt, and given Brent crude oil is still up on Friday’s end, but only marginally, it would suggest the flat price is holding.
Last week we would have expected the ARB to narrow, as the feel of the Mont Belvieu market was stronger, but FEI kept pace, and in fact the strength in FEI appeared to have out-gunned the U.S. numbers, with the December paper ARB widening from $178/ Mt at the start of the week to $184/ Mt by Friday. Unless we see some weaker news emerge States side today, we should see the ARB narrow a dollar or so, as the U.S. market should at least hold its strength. That’s pretty much how the ARB works, it’s all about relative strength and weakness of the two markets, taken from what the players put out as numbers, either through the window, off-market or via the paper brokers. It’s about subtle feelings of direction. Of course, when everybody strongly believes a market is weakening it tends to exacerbate the fall and vice versa, as momentum can move the market much faster than anything.
While the Asian market has been holding its own last week, Europe still appeared to be coming from the bid side in December, both in the first and second halves. Now with the ARB still favouring Asia over Europe, and with the supply of a couple of cargoes being redirected to Asia in recent weeks, the supply scenario in Europe has tightened, with no surplus cargoes reported or on their way. We’ll need to keep half an eye on Europe’s relationship with Asia, especially as it only costs a couple of dollars more to transport propane from Marcus Hook to Chiba, compared to loading in Houston, and in winter, cargo source acceptability, versus Ginga terms & conditions, becomes less of a factor.
The shipping market appears to be taking a wait and see approach, with December just about done, especially as booking tonnage has been running beyond the normal 25-35 day forward informal window. West of Suez enquiries were just about non-existent, and this still concerns me a little. We’re all somewhat a gasp as to the record propane exports from the U.S. last week, but the freight market hasn’t shifted, if anything it’s maybe on the slightly long side. Without doubt there’s been a move away from loading a couple of tanks of uneconomical normal butane, which is trading FOB Houston at a differential of $45/ Mt above propane, while in Asia the butane premium is just about holding in double figures as we wait for the announcement of CP later in the week, which tends to give us a clearer picture of the true differential. So it’s understandable why more propane is being loaded, and again it slightly dilutes the talk regarding the increased Enterprise and Targa export capacity increases. We are seeing an export rise, but maybe less than 10% is more realistic. I was expecting freight to then start to shoot through the roof, but it still looks as if the absorption of more ships, that decided to divert west earlier in the month, has also paralleled the increased export volumes. All eyes are now focused on January 2020, and what happens next. By fixing ships slightly more ahead of the normal transaction period, there is time for the parties to reassess what happens next, a few more trader re-lets have become open east of Suez, and with IMO 2020 appearing to have also entered a similar lull period, we might see a small re-adjustment downwards in the early part of the week, but more a result of overall inactivity than specific direction. But, the shipowners are keen to point out the delays at discharge ports in Asia and through the Panama Canal, upcoming west African tenders, and the fortunate position to be able to sit back a little.
Our attention in Trade Secret this week is going to focus a little more on the out-months, as the front is most likely to tread water, given the short working week over in the U.S., and we also need to think if there is another U.S. propane cargo to pick up physically in our virtual trading space. But overall it’s time to take stock.