SIMON SAYS: It’s about time to get the crystal ball out!

Submitted by Simon Hill on Wed, 12/18/2019 - 17:00
It’s about time to get the crystal ball out!

It’s that time of year again when we all try to make predictions of what’s going to happen next year in the LPG industry, and start to think about setting a few New Year’s resolutions, some we’ll keep and others we won’t. Will it be more interesting than this year, well the LPG market always throws up surprises, and that is about all we can guarantee. Bring on the new decade!

It’s always good to start with predictions about the crude oil market, as they are still the driver for pricing and for future production forecasts. Always the leader of the pack is Goldman Sachs, and in a report picked up by Bloomberg recently, they are forecasting a lift in crude oil prices, mainly due to the deeper OPEC production cuts offsetting demand uncertainty, and the dreaded over-supply scenario. Goldman Sachs are expecting the Brent benchmark crude oil price to average $63/ Bbl, while West Texas Intermediate (WTI) was up at $58.50/ Bbl. Their longer-term prognosis was for $55 and $50/ Bbl for the two grades respectively. Yawn, yawn, forgive me. They reckon OPEC, and their buddy Russia, will comply with the reduced quotas, even though they haven’t managed to keep it together for long before. If they all comply, then 2.1 million Bbl/d will be removed from the international arena, but the investment bank is warning that growth in U.S. oil supply by 600 M Bbl/d will go a long way to offset the actions of the cartel. My view, for what it’s worth, is that OPEC may have to keep chasing its tail to keep the lid on supply bursting back above demand. 2020 is going to be focused on climate issues even more than we have seen this year, and the subliminal impact on demand will also be greater. I think we are heading for an average of $57.3964572319/ Bbl to be precise, in other words I think the Goldman Sachs forecast is about as good as you can get!

For LPG it is really a question of where the price will end up against crude oil. I still believe the main marker ratio is Mont Belvieu propane against WTI. It’s been on a hell of a ride in 2019, from over 60% this time last year, plummeting to 29% in the third week of August, before being jollied up to 43% at the end of November. By Friday last week we were down again to 36%. The main issue that led to the sudden drop off in the ratio was NGL takeaway concerns, as capacity was being maxed out for pipelines, fractionators and more recently export cargoes. It was also a period when natural gas prices declined to just above $2/ MMBTU, lubricating the NGL ratio fall. The market bounced back up, as the top of the inventory cycle was starting to look as if it would settle at nearer to 100 million Bbls, rather than the extreme forecasts of over 110 million Bbls, being heaped around in the summer. Then came the late and wet harvest, better petrochemical margins for propane, as well as some cold weather in the mid-continent. But it didn’t last long, and the market has again gone back to finding ways to evacuate propane away from the U.S., and over the seas to Asia. Unfortunately, the fractionation and export capacity problems have not been as easy to solve as many had hoped. So, what is in store for next year?

The international market keeps hearing the negative reports coming out of the shale regions, especially the originating corporates, whose models were the “must have” investment vehicles for the money slushing around in Wall Street five or more years ago. Normally mid-sized and large-cap energy stocks show greater stability than their smaller brothers, but a few have been shamed by their performance in 2019. Antero Resources has been down as much as 70% year-to-date, and they are a name clearly associated with the shale revolution, with dry natural gas from the Marcellus and Utica shales in the Appalachian region, where production is cheap but selling is cheap also. Oasis Petroleum has been caught out with lower production numbers versus forecast, and with a lawsuit to boot, their stock has shaved off nearly 50% in the last year. Even Occidental have slipped 40% in value following their purchase of Anadarko. But I’m more optimistic for 2020. Okay, it’s going to be much harder to find the easy financing to drive production, especially in the Anadarko, Appalachia and Eagle Ford areas, but the northern production will have to keep flowing because of pipeline commitments forcing producers to take the less costly option. The Permian basin is still the shining star, and oil production for January 2020 alone is forecasted to grow by 50 M Bbls/d. Crude oil growth is not as high in the northern production regions, but natural gas production, especially in Appalachia, is due to contract. This is where the greatest dry natural gas sits, and the impact on NGLs may be less in 2020 than most people believe. I’m sitting on the fence a little, and I’m predicting that we will see Marcus Hook exports limited to 8-9 VLGCs per month. So stagnant at worse.

With the new capacity for fractionation and exports currently coming on, as well as more capacity expected during the second half of 2020 in the U.S. Gulf area, I therefore believe we will start to see exports hit 13 VLGCs per month by mid-year, and 22 extra per month by the end of 2020. If I take the average for the year at 14 VLGCs per month, that’s the equivalent of over 7.5 million Mt for the year as a whole, equal to 250 M Bbls/d of LPG. Certainly, I see the first half of the next five-year period as being a steeper production growth curve, and the inventory in 2020 could easily absorb a cut of 100 M Bbls/d, without dramatically impacting the ARB, so why shouldn’t these ships get loaded.

In tomorrow’s SIMON SAYs I’ll give you what I think about the ARB, where the cargoes will go, the future of the U.S. / China trade spat, whether Iran will rear its head again as an impact on LPG exports, which traders will show more and which won’t, and my final view of the year on the direction of the shipping market for 2020, IMO and all that. As we get towards Christmas it’s not quite the time to relax, not yet anyway.