SIMON SAYS: Let me know if you see a bear around – anywhere will do!

Submitted by Simon Hill on Mon, 10/28/2019 - 17:00
Let me know if you see a bear around – anywhere will do!

Yesterday I was in my comfort zone, the market action was clearly at the front of the curve, where some real time world LPG supply issues were having a significant influence on demand decisions in Asia, as we enter that winter run-in, just like the old days. Middle East LPG exports in October down, down from Saudi Arabia and right down out of Iran. U.S. Gulf exports at no change, despite being told we were supposed to be getting a 15% increase in export slots late third quarter. It’s now nearly November and I think the only certainty of seeing new slots being occupied is by taking a flight over to Las Vegas, for the opening of the Circa Resort & Casino.

There’s clearly rumblings in the Asian market. It’s time for demand to start an upswing as temperatures start to ease off above the 30 degrees north line, the new propane PDH plants in China are revving up and need propane from the Middle East, while India’s demand in September this year was nearly 20% up on the same time in 2018. Furthermore, its unlikely to ease, as demand for LPG typically climbs after the monsoon season ends in early October, and the Diwali festive season starts in the fourth quarter. Add to this the lack of Indonesian contract coverage, the continued LPG use in the petrochemical sector, and uncovered trader shorts, then a bull market is likely to be with us for a while to come. Did someone just mention Chinese domestic demand was weak? Sorry I must be hearing things!

So how does Europe fit into this picture? There’s still single digit premiums being paid in the first half of November in North West Europe, with the market looking fairly balanced through mid-December, but propane’s been losing ground against naphtha, while gaining ground against Asia FEI levels. It’s also bringing the Houston to Flushing ARB netback numbers in the U.S., closer to the Houston to Chiba levels. It looks as if the 5 VLGCs that have left the area, mainly to Asia, are having an impact on the supply/demand balance, coupled with low volumes coming out of Karsto in Norway, Ust-Luga in the Russian Baltic and the U.K.’s Braefoot Bay terminal. In fact, a couple of the mid-size ships usually operating within the northern European waters have ballasted over to Marcus Hook to load. So, don’t expect Europe to squeeze any more cargoes out in time to reach the Far East before the end of the year.

If the Enterprise Products earnings conference call reveals something concrete about increased capacity, which we are not seeing at the moment, i.e. more exports happening, then surely we will see cargoes move, especially if terminal fees remain in double digits, but what does this mean for the big element of all ARB calculations, the freight?

The rate from Houston to Chiba, if anything, is holding high and very steady, as is the rate from Houston to Flushing. With the Baltic rates having dropped by nearly 13 per cent in just a week, there’s been a feeling that with western premiums returning to the ship owner’s freight calculations, we would see ships heading towards the U.S. Gulf. In fact, there are reports that a few ships waiting for orders in Singapore and even Galle, in Sri Lanka, are heading west, not an armada, but enough to question where rates might be heading for U.S. liftings, while at least halting the decline for the Ras Tanura to Chiba, Baltic index. The ship owners view is that the extra ballast involved is worthwhile, in order to get the rate premium, and an extended voyage time at the higher rate. Of course, we are questioning whether there will be the requirement for extra ships, maybe they will, may be they won’t, let’s see what the conference call has to say.

In addition, we are seeing a small drop-off in exports from Marcus Hook. With the recent dip in temperatures, and winter demand only just around the corner, the dynamics in Marcus Hook are starting to change. The small amount of butane availability out of Marcus Hook, and terminals such as Chesapeake, has already disappeared, as the winter gasoline specification is sucking up more of the C4s. On the propane side around 50 M Bbls/d has been delivered in recent months to Marcus Hook by truck and rail for onward export, even though Energy Transfer’s ME2 pipeline is operational, it’s not at full capacity, and ME2X is still work in progress. These quantities are worth more than export value up in PADD 1 in the domestic propane market, if the demand is there. Traditionally the winter propane demand in PADD 1 has outpaced supply, where a cold winter would have meant propane imports along the northern part of the east coast, into Newington, Chesapeake and Providence, while supplies heading up along the TEPPCO pipeline from Mont Belvieu could easily go on restricted allocation, pushing costs up. It therefore looks as if tertiary storages are being filled-up, both from inventory in PADD 1 and redirected non-pipeline sources. It may also be the case that some small quantities of Marcellus/ Utica NGL production that lands in Marcus Hook, could also end up in the  domestic market rather than for export. This is the first year of such large exports out of Energy Transfer’s facility, so we need to keep an eye on how this takes shape over the winter.  

But the underlying issue, in the back of a lot of players minds, still remains the reduced volumes from Saudi Arabia and Iran, on the other hand this has to be measured against the impact of ships starting to head for scrubber refitment, and for bunker tank purging. In fact, the shipping market looks as if it is moving beyond the cargo supply question. It feels as if the east market has bottomed-out, after the recent drop in rates, with trader re-lets, notorious for dropping rates in a slack market, have almost all gone, and there’s more activity overall on the chartering side anyway. Baltic levels that reached the low $70s/Mt from Ras Tanura to Chiba, are now heading back up, with rumours of a ship already being fixed in mid-November for mid-$70s/Mt. At the same time that sickening word for charterers and traders has re-emerged, yes “FOG”! But this time it’s around the Panama Canal, and although delays are currently only 3 days or so, there appears to be a knock-on effect on available booking “slots”, which you can probably gather is my favourite blog word of the day.

So, what does this all mean for our virtual trading room, and especially our physical cargo due to load hypothetically in late November, that is hedged but not sold. I don’t think there is any reason to sell the physical yet, as supply just looks so shaky at the moment. There is a premium currently between physical deliveries in the second half of November, even first half December, against the paper values for the November/ December FEI spread. But it’s not time to sell the physical yet, as we would be forcing the cargo into the virtual market, and I can tell you, “computer-generated” buyers can be a nightmare, especially as our delivery would be arriving in early January, and the market is currently heading the way we want it to. I love this virtual trading, but maybe my bank manager isn’t quite up with it yet!