SIMON SAYS: Looks like someone’s holding all the cards!

Submitted by Simon Hill on Mon, 12/16/2019 - 17:00
Looks like someone’s holding all the cards!

It always seems difficult to apply the right adjective to a market, strong and weak cover all magnitudes, booming, roaring, explosive, rocketing, rising, surging are all to be found in your on-line thesaurus, but I’m not sure if they are on the button when it comes to what the market showed last week. Asia appears to be moving from reasonably firm to a lot stronger, I guess I’ll have to make do with those descriptive words for now. I used to get excited with sudden jumps in any market, especially if our position just happened to be on the right side of the jump. Although the market is not roaring away, it is showing signs that there is concern at the front of the physical curve.

Last week saw the Asian window at it’s most audacious self, with bids dominating the screen blasts, as bid levels at the beginning of the week were seen in the low teens, for premiums above the FEI index intended for second half January deliveries of 23,000 Mt, suddenly coming to life mid-week. When the bids are led by the traders, you know there are potential fireworks coming. On Wednesday they waited a full 14 mins even to get going, entering at Jan FEI + $12.5/ Mt, but within the next 14 minutes and 45 seconds, the bar had been raised 15 times by a combination of traders, resulting in a final bid of plus $20/ Mt.

One of the arts of trading, and especially in LPG, is to sense what cards other players might or might not be holding. The analogy with poker is often used, and this week the application to the world of LPG cargoes is fully merited. The chatter on the market for a number of weeks now has been centered on the physical reality, and the signals it is giving everyone. The Middle East looks sold out, as any extra cargoes were being syphoned from storages, which don’t appear to be bulging with LPG. The recent OPEC cutback announcements were only pointing in one direction for LPG supplies, and Iran was at best chugging along. It’s also demand season in the Northern Hemisphere, and however quickly climatic change might be occurring, it’s still a period where traditional heating demand goes up, and if cold weather does strike, then demand can go haywire. Asia’s petrochemical plants are also cracking LPG at near maximum rates, and the new wave of Propane dehydrogenation (PDH) plants in China are sucking in propane imports, at a time when the logistics of the market are strained by the Chinese tariffs on U.S. sourced LPG, as part of the tit-for-tat U.S./ China trade war. Then any hope that the U.S. exporters could magic-up more export cargoes has been dashed by a build-up of expectation, not matched by a build-up of ships leaving the Texas coastline en masse, that is brimming over with LPG that is unwanted domestically.

Traders have weighed up in their minds, that a push on the bid side in the window is unlikely to draw too many sellers out of their shelters, as any potential sellers can’t afford to give up physical cargoes they might need in their January import programme. Yes, there could be traders willing to short the market, but it takes a brave person or company to do that, especially if the big boys are cranking up the bids. Gone are the days of the counterbalance between Seb Willems at Glencore in one direction, and Ignacio Hidalgo, then of Gunvor, in the other. Also underlying the big trader strategies is the end of year accounting, especially in stock valuations in Asia, where any push on Saudi January CP values will be likely to make the year a little more positive.

Then Thursday came, with the window dominated by two words, “trader buying”. There were only 12 bids, no offers, and all of the bids came from one trader, at intervals of one and two minutes, plus or minus a few seconds, raising the premiums above January FEI for second half January deliveries, from an opening bid at plus $18/ Mt to plus $29/ Mt. At no time did anyone open a position, be forced to close one, or simply cash-in, by taking the bid. In the meantime, the paper market was a little hesitant to over-react, but even January/ February FEI time spreads jumped by nearly $10/ Mt to a positive $23/ Mt. There are always people on the periphery of the daily market who will look at the screen and ask why did the trader get it wrong, but they are missing the point. The trader can only test his theory on the market, his assumptions on what cards other players are, or are not, holding, if he actually gives it a go by putting in a bid, or for that matter an offer. Who really knows what position said trader might be holding, but it’s more than likely it will be paper length? They, and the other traders, will have weighed up that the timing is right to test the market. The only way to check what is out there in the market, or to gauge what other players might be thinking, and in a very visible way, is to use the window itself. Why not, it’s there to take bids and offers, and because of the relatively small amount of units normally traded, one party can dominate a day’s activity. It’s a risky game, but at the end of it the supply section of the market has not reacted, maybe they will soon. Monday’s window can be characterized by the proverb “after the Lord Mayor’s Show”, when in history a “donkey-cart” at the rear of the procession was there to clean up the manure after the pageant. Maybe players are waiting to see what happens next or maybe the job has been done.

If anybody felt that the antics of the few bidders in the window last week was not representative of the market as a whole, then they better think again. The window drives the strength of the Asian market, and the combination of forward paper prices, plus or minus the premium or discount, results in the level of FEI published by Petroleum Argus. If the FEI premiums are reasonably firm, or a lot stronger, then the U.S. market has to match it or beat it, if not the ARB gets wider. But how will the U.S. at least match the strength in Asia? It needs to export, but it’s constrained at the moment by a lack of export and fractionation capacity, growing yes, but not growing by any means fast enough.

I’ll take a closer look at the U.S. market’s influence on the ARB tomorrow, and I’ll try to see if there is going to be any trader play on U.S. prices similar to what we have seen last week in the Asian window. I personally don’t see it, but I have noticed a run on terminal fee premiums, a big run. I wonder why?