It was a late night, early morning, and I was still digesting my turkey, corn-bread stuffing and pecan pie, when I realized it was “Black Friday”, fortunately for me my wife hadn’t. Oh, by the way the Thanksgiving dinner was great, but of the 20 people invited, there wasn’t an American in sight. So, as we enter December will Black Friday discounts start to have the same influence on the LPG market, I don’t think so, it’s still looking as if the buyers are having to step up to the mark, and maybe more.
Buyers in Asia had to absorb the news of a higher than expected Saudi Aramco CP being set for December, with both propane and butane prices up by $10/ Mt, which was above the highest customer recommendation by $5/ Mt on propane. Maybe the strong crude oil prices in the last few days, leading up to the announcement, helped to spur Saudi Aramco to push prices up, and this move on CP has helped to strengthen the Asian structure overall, so Saudi Aramco looks to have probably called it right.
The usual suspects have been in the market, with Pertamina reported to have awarded their last tender for three cargoes, each evenly split, delivered across the whole month, and then just to keep us on our toes we get a fourth spot cargo requirement for early January. Earlier in the week Indian Oil Corporation (IOC) bought a second half January cargo for delivery into Ennore and Haldia, also at a higher premium than in recent tenders. The new tranche of Chinese PDH buyers are still very much evident in the market, especially the one whose name reminds me of a gaming casino, I believe they are called Grand Resources. But the requirement that really caught the eye was the full propane tender issued by Formosa Petrochemical Corporation (FPCC) for delivery into Taiwan in early January.
It’s unusual to see a petrochemical buyer, not only still in the market for a full cargo of propane so late in the season, but also buying at a discount against naphtha that appears to be lower, especially in comparison to FPCC’s previous purchase a couple of months ago. Yes, it’s a sign of the seasonal impact of propane moving up against competitive fuels, but it’s also an indication of naphtha’s strength given cuts in refinery runs and turnarounds impacting naphtha availability, a reduction in condensate exports from Iran, while steam crackers have continued to run propane as the preferred feedstock despite some questions on margins. At this time of the year we expect the petrochemical buyers to be retreating from the market, even reselling back into it.
There were rumours a week or so ago that we might be seeing the odd spot cargo appear from Saudi Aramco, but we haven’t really seen much evidence of this, even though last week a producer was willing to sell a cargo from storage, but the expected premium was a clear problem to making any deal work. Other than that, the market was still concerned about Iran exports, which were again down below fifty percent of the forecasted pre-sanction production levels. So with freight levels dropping from Ras Tanura to Chiba, it does feel as if Middle East supplies are not over-flowing, even if buyers preferred they were.
If there are traders in the Middle East with VLGCs to re-let, then it usually has two implications, firstly that the trader cannot get hold of cargo themselves on the dates they need, or at values that would equate to the levels achievable in the spot freight market, and secondly, as a result they will undercut the traditional ship owners to fix-out their ship. As a consequence, spot levels came off from nearly $77.50/ Mt in the previous week to around $73/ Mt by last Friday. There seems to be a few re-lets still open in the mid-December period, and with most players having concluded their business early, given the forthcoming festivities and the timing of market trades going further out as a result of the strong market, we might see further pressure on freight levels.
We’ve probably seen a reluctance of ship owners, in recent months, to rush and find dock space, in order to have scrubbers fitted, or to purge their bunker tanks in readiness for switching fuel grades in the next few weeks, as IMO 2020 approaches. By putting off the unavoidable, ship owners hope to ensure they keep their earnings in line with the current super-high freight levels, as they say, “better a bird in the hand than two in the bush”. So a few VLGCs could start to disappear in the next couple of weeks, may be cushioning any downward spiral in freight rates, but also ensuring that we are not going to see too many ships arriving in Asia in January with cargo to sell on board.
So the buyers in Asia are weighing up what happens next, as they see persistent and strong petrochemical demand defying the LPG seasonality norm, and as of today, the base price for Middle East supplies is a little more expensive, with the barometer suggesting less, rather than more, availability. Throw in the fact that the market swings more to propane, and the Middle East starts to struggle to push up its propane availability anyway. But we’re seeing record U.S. propane exports, so should buyers in Asia be getting worried? Well, if you look at the way prices moved last week, they are showing signs that they are certainly getting a little concerned.
Okay, the window looks as if it’s been practically boarded-up, with trading again slender. Yes, a lot of business has been concluded ahead of time, but there is an eerie quiet, or players are hashing-out deals silently, not a distinctive trait of the LPG market! Second half January premiums certainly were up, and what deals were reported, were closer to $10/ Mt over FEI prices than the previous sub $5/ Mt levels. Even a full cargo of propane arriving just after the New Year was concluded around $5/ Mt. But as demand looks as if it is re-surfacing, more eyes are now turning to the U.S. sourced cargoes, and clearly timing comes more into play when trying to piece together the true picture. Cargoes that were being lifted in November were still predominantly split cargoes of propane and butane, the majority on-sold to buyers with shorts into Indonesia, and for exchange with Asian buyers still catching-up on supply shrinkage post the drone attacks in Saudi Arabia, that in fact happened less than three months ago, even though it feels far longer. So it’s understandable to see more propane now being exported.
In tomorrow’s SIMON SAYs I’ll look much more closely at U.S. supplies on the water, and what’s coming up next. There are a few issues that have raised concerns in Asia about whether the U.S. is a tap that can be just switched on and off to satiate the requirements of an Asian market troubled by a year of uncertainty. Whether it be as a result of the continued U.S./ China tariff war, together with the stop/ start negotiation melee associated with it, the attack on Saudi Aramco’s production heart, of both crude oil and LPG, the Iranian sanctions tightening, and the ups and downs of demand in the new large consumers, yes China with new PDH capacity, but also an Indian market hit by buying overruns, politics and growing pains, these uncertainties will linger for some time. So the word “fog” is only going to make the hair stand-up on the back of most Asian buyer’s necks.