SIMON SAYS: Markets never follow the script!

Submitted by Simon Hill on Sun, 11/24/2019 - 17:00
Markets never follow the script!

I know markets are supposedly 24/7 these days, but come on, it’s the holiday season a coming. The market is starting to show signs of easing back, getting programmes sorted and balanced, not taking on any more positions that might need late nights and early mornings sorting out potential problems, instead allowing for late nights and early mornings having fun, albeit in a more thoughtful way, and by the way, that’s not a veiled parallel to our excruciatingly misguided Prince Andrew. But as always there’s bound to be something about to happens that’s going to ruin the party!

So, next week we have “Thanksgiving”, then it’s the party build-up to Christmas and the New Year, followed by Chinese New Year in Asia. All are starting to impact the LPG market, more in preparation than any substantive market move. But as always something is going to give, pushing the market one way or the other, however much we would like to think we could do with a bit of time for once to take-in the festivities.  

Although the market last week could have been defined as sleepy, the north American market is still showing signs it’s bubbling up somewhere, probably resembling my London apartment’s radiator, cold in the middle and lukewarm around the outside. For the first time since the Polar Vortex of 2013/14, Enterprise’s TEPPCO pipeline running from Mont Belvieu, Texas up to Monee, Illinois in the far north of the U.S., has had the approval from the Federal Energy Regulatory Commission (FERC) to pump emergency volumes of propane along the pipeline, for a 30 day period up to the end of the year. The reason cited was the record demand for propane, as strong requirements from farmers for crop drying has overlapped with a robust bout of heating demand for propane, resulting from the below normal cold weather hitting the region.

Although PADD 2 inventories are at their lowest since 2013, it’s the infrastructure that’s causing the problems, not a lack of propane sitting in storage. Also, while the demand scenario was very similar in 2013, with delayed crop drying being a feature at the beginning of the winter before the cold weather took grip, stocks on the other hand were pretty much exhausted, and Conway prices had significantly jumped over Mont Belvieu prices. This year the prices did match Mont Belvieu levels for a short time, but in recent days Conway propane prices, in comparison to its bigger hub brother, has eased back, and this means to me that more volumes will be heading south than coming the other way, again backing up the fact that it’s not stocks driving this.

Yes, this week’s EIA numbers in PADD 2 have come out 3 million barrels down on where we were at the end of October, but it’s not jaw-breaking, it’s bearable, and that‘s also the conclusion most traders have come to as well. They see more local production, especially in comparison to the polar-vortex winter, and with levels above 500 M Bbls/d for most of 2019, any drop in short-term stocks could be quickly replenished. In addition, a lot of traders are besotted with the colourful weather maps, still showing forecasts of warmer than average weather across most of the consuming regions of the U.S., post the festivity period, and before Easter 2020. And don’t forget the crop-drying season is only a few weeks away from coming to an end.

Whether bullish trader interest is going to return, will depend on how the infrastructure bottlenecks pan out. In recent issues of SIMON SAYs we’ve eluded to a few issues impacting the region, especially the absence of available propane supplies, usually built-up in storages around the Mid-west over the summer, disappearing mainly as a result of most excesses of propane heading for export out of both west Canada and Marcus Hook on the U.S. east coast. When you link infrastructure problems in the Mid-west, with the general takeaway issues, pipeline constraints, fractionation and export capacity limitations, these bottlenecks are bound to occur.

Now I’m hearing there’s more disruption happening, this time further north, over the border in Canada, where over 3,000 employees of the Canadian National Rail Company have been on strike for a week now. They are also one of the biggest carriers of oil, propane and grain. So, what better time in their minds for the unions to action the strike, just amid the harvest season, and the start of winter propane demand. Imports of propane from Canada into the Mid-west during cold weather are an important part of the overall market dynamics, but prices up in Edmonton are now at a premium to Conway. Sarnia is on the same track as well.

As the week closed there were rumours that propane rail shipments within Canada and south to the U.S. had been totally sidelined in an attempt to push the Canadian authorities to yield to the worker’s demands. A number of provinces in Canada are running out of propane, fast! Around 100 M Bbls/d plus crosses the border at this time of year, heading to the midcontinent, so the strike has not only caused a serious problem in the Canadian propane market, but has also exacerbated the issues that have been happening in the midcontinent of the U.S. However, prices in Conway haven’t been reacting, probably the result of the TEPPCO emergency volumes flowing north. Amazingly, the way prices are jumping up in eastern Canada, has meant we might even see PADD 2 volumes move across the border, if the differential is near to 45 cents/gallon, and we’re not far off now. But what does this all mean for exports out of the U.S. and for that matter from the Prince Rupert terminal in western Canada?

The key is always the flow of volumes up to Conway or down to Mont Belvieu, the emergency volumes heading up TEPPCO are only temporary and they are heading more towards the consumption areas, rather than to Conway, where barrels are still likely to be heading south, although in smaller volumes, and I believe a big proportion is Y-grade anyway, heading for the Texas fractionators. So, if TEPPCO volumes continue to head north, it can only add to the draws in PADD 3 we saw in last week’s EIA report. Although there is an underlying theme suggesting the pull of barrels north is not as great as we could have expected, and is also unlikely to be prolonged, therefore keeping prices under control, we have still seen a big U.S. inventory draw in the last two EIA reports. 

At first sight, U.S. domestic Mont Belvieu propane values have surged, but as a proportion of WTI they are still sitting at around 40%, even with these specific propane demand issues of cold weather and crop-drying demand, coupled with import supply problems north of the border. The equilibrium model would have anticipated Conway prices to react upwards given the jump in Canadian prices, the resultant drop in exports to the U.S., and the potential of sucking-in of volumes from the U.S. north east, especially into the Sarnia region. This should then have pulled Mont Belvieu propane prices higher, as less Conway barrels would head south, and as the emergency measures on the TEPPCO pipeline pulls Mont Belvieu  barrels northward. As prices move up relative to crude oil and other product values, the ARB should come under pressure to narrow, and exports naturally drift downwards or cancellations kick-in. Last week exports hit a record high and the ARB widened, who’d want to be a trader getting his or her Christmas party clothes unpacked, in what’s probably the third stage of their lives. Stage one was believing in Father Christmas, stage two was not believing in Father Christmas, stage three is where a lot of traders are now, dressing up as Father Christmas, and the final stage is where I’m heading, looking like Father Christmas. Sorry a lot more festive jokes on the way!