SIMON SAYS: Looking forward is painful, but its better than looking back!

Submitted by Simon Hill on Sun, 08/30/2020 - 17:00
Looking forward is painful, but its better than looking back!

As we reach the end of yet another month in this exceptional, and yet very worrying year, I feel that we are also approaching an important watershed. There appears to be this growing dilemma, a divergence of opinion, between those looking back, and those trying to look forward. This is not just being found in the scientific and political ramblings associated with the coronavirus pandemic, but even more so in the economic opinion being voiced globally. As the world’s central bankers gather for their annual forum at the Rocky Mountain resort in Jackson Hole, albeit in a virtual format, and without the celebrated views of the Tetons, they confront an IMF forecast of a world economy shrinking by 4.9% in 2020. Such a forecast brings shivers down most people’s spines, especially mine, but it also incorporates the initial and most damaging wave of the economic destruction mainly encountered in the second quarter of this year. Yes, there are likely to be further waves of COVID confusion that we will all have to face, but the advanced economies are recovering, they are nudging back, notwithstanding the likelihood of future growth rates coming-in well below the levels we have been used to in recent years.

The energy and LPG markets face a similar quandary. Let’s not forget that LPG tends to be a supply driven market, so investment decisions impacting the production end of the supply-demand equation, tend to be more allied with those depressing longer term views on world economic growth, exacerbated by the ever-growing movement away from fossil fuels. It’s difficult to click on any news feed in the oil and gas sector that points to more petrodollars being directed into increasing crude oil and natgas production. OPEC is more interested in keeping the past volume cuts in place, in an attempt to underpin prices, than any belief that future oil demand will allow for any dramatic increase in crude oil being pushed out of the ground. At the same time oil exporters are desperately trying to divert spare funds to investments outside of oil and gas, that will provide a better longer term payback for their economies. The U.S. shale patch is still struggling to attract investment dollars to maintain, let alone grow production. As the original shale companies approach economic “make or break” time, the potential suitors, namely the big oil companies, are changing their goals, moving into renewables and away from their original lifeblood. The long and short of it is that I don’t see any likely bounce-back in LPG production feeding through to exports.

But as I’ve said, demand is edging up, certainly when compared to recent months, if not previous years. The question is when will the LPG market start to recognize this? Are we about to see a price break-out, despite what appears to be a physical overhang currently being seen in Asia, mainly as a result of high inventory levels? As long as we don’t see a further lockdown across Asia, we should start to see demand tiptoeing up, and at the same time storage levels creeping down. Although players are still talking about second half September cargo arrivals, only just nudging into early October, it’s surely the start of some kind of increased winter demand. I can understand the recent demand drought increasing storage levels, and pushing buyers away from having to make “stock-build” purchasing decisions, but this could change quickly, and I’m not sure there’s too much supply to be had.

Although the Asian window was lacklustre to say the least this week, the reports of a number of private deals being concluded at low to mid-single digit discounts in October, only adds fuel to a potential push up in prices, relatively speaking of course. There are other signs too of an edging up of demand, with India’s main importer IOC tendering for a couple of evenly split full cargoes for delivery in the second half of October. This might also trigger interest from Chinese buyers, concerned about worsening U.S./ China trade relations, and less visible spot cargoes in the Middle East. If prices were to remain static for a little while longer then we will also see more petrochemical buying start to appear. Even typhoons in and around South Korea, coupled with an expected higher CP level in the works, can only help in raising a few questions in the minds of buyers.

In the meantime, EIA’s weekly U.S. propane stock levels were pretty much on forecast at 90.8 MM Bbls, up 1.5 MM Bbls on the week, and not too far away from the 90 MM Bbls recorded a couple of days later last year. Propane production is still keeping up in the 2.2 MM Bbls/d range, but surprisingly propane exports fell off after the previous week’s jump. I’m still of the opinion that we are seeing more previously stored Y-grade being run by the fractionators, and with potential propane demand from the more versatile U.S. petrochemical buyers, the story is getting a little muddled. What is for certain is that the ARB economics are still discouraging cargo liftings, with cancellations still the more likely scenario. I therefore don’t see why this should start to change anytime soon, especially under the current belief of an over-hang of supply in the Asian market. So if demand is edging up as I’ve suggested then the speed of reaction from the U.S., as far as exports are concerned, is unlikely to be fast. In fact there is still a concern in the domestic market that we might well start to see inventory builds underscore projections, and propane retailers may well enter the market to secure barrels, potentially pushing Mont Belvieu prices higher, and making the ARB less likely to widen, again restricting potential export cargoes hitting the Asian market in October and November.

Signs of less cargoes moving can normally be detected in the VLGC market and there are signs this week. The Middle East has come under some pressure with no new enquiries helping to push the Baltic index down a couple of dollars over the week. Players are anticipating cargoes, whether it is further afield in Canada, Australia or WC Africa, but they haven’t appeared yet. This has led to a number of ship owners and traders ballasting their ships west in search of cargoes and premiums. But with players talking end September stems, and even early October, a number of earlier open ships are putting some downward pressure on rates. Even the hurricane activity in the U.S. Gulf this week has thankfully passed without the damage anticipated, meaning that the delays to VLGC loadings and passage has not been as bad as it could have been.

So, with a number of market sages expounding on how boring the energy market has become, not least LPG, with volatility levels way down on those seen a couple of months ago, with Brent having not moved more than $1/ Bbl in either direction in more than 60 days, it’s difficult to feel that any price break-out can materialise, but as Storm Laura passes, is this just the quiet before the next storm, this time a fast-moving price front?