SIMON SAYS: Nothing stays the same in this business!

Submitted by Simon Hill on Sun, 01/05/2020 - 17:00
Nothing stays the same in this business!

Happy New Year to everyone in the world of LPG. And what a festive season to remember, and I’m not talking about presents, turkey and seeing in the New Year with your favourite tipple. The dislocation in the market has gained even greater momentum over the last two weeks, as the ARB has widened to over $300/ mt for the prompt month of January 2020. For propane that’s the equivalent of over 60 cents/ gallon. And yet the producer, having shifted his barrels to Mont Belvieu, is struggling to get much more than 45 cents/ gallon for his product. Do you ever think you’re maybe in the wrong game?

I know what you’ll all be saying, so what about the assassination of General Qasem Sulaimani, Iran’s top commander, hit outside Baghdad’s international airport on January 2nd? Yes it’s serious news with the possibility of extremely serious implications, but the LPG world is already in turmoil, directly attributable to actions taken by some of the main LPG players themselves, especially in the U.S. Gulf. With all the uncertainty in the Middle East likely to gather pace over the next few weeks, this turmoil is unlikely to fade, so what’s been the cause and what ultimately will be the solution?

I’ve been banging on and on about U.S. export capacity in the weeks leading up to the end of 2019. Despite the announcement of additional export capacity coming on stream by the beginning of the fourth quarter 2019, we’ve seen only drips and drabs, certainly nothing to suggest the ten extra cargoes out of the Enterprise terminal along the Houston Ship Channel, which the market was pretty much led to believe were coming. Yes there are other reasons why the ARB is as wide as $300/ Mt, but this to me is by far the most important factor of all. We can argue the reasons why, whether the anticipation of new terminal capacity was a means to take the wind out of the sails of those parties moving forward with new terminal projects, or whether delays in the upcoming fractionation capacity expansion slowed the export enhancement process down. What we can’t argue with is the market, and while the world price, especially in Asia, has continued its upward path, the only levels gaining momentum in the U.S. have been the re-sale prices for loading slots. Not new slots but the same ones we’ve seen pretty much month-in and month-out for the last six months or so. U.S. propane price levels have in the meantime started to drop.

Propane values in relationship to WTI crude oil prices had climbed up from the end of October 2019 low of 34% to 44% by the beginning of December 2019. Today they languish below 30%, unable to gain any visible strength at a time when propane would be expected to out-shine crude oil as winter propane demand takes the lead. But despite WTI crude oil prices appreciating more than 5% in the same period, and that’s before the assassination of General Sulaimani became news, propane has barely held its own, despite encouragement initially from a late crop drying season, Canadian transportation problems and early winter demand exacerbating supply issues in the U.S. mid-continent. The simple fact is that with warmer than average temperatures in the U.S. at the moment, and limited consumption upside from the domestic olefin crackers, the U.S. requires exports. It’s no secret, it’s not a surprise, but it’s certainly the main reason for the decline in U.S. propane prices at a time when world LPG prices are pushing upwards.

I also spent a lot of time last year trying to gauge the impact of Y-grade inventory, as storage levels consistently appeared to be on the higher side of expectations, even though production numbers hardly moved. The weekly EIA numbers were certainly clear with regards stock levels, they’ve been significantly higher than last year, despite all the noise about takeaway issues, slumps in the price of natural gas and concerns about shale oil and gas companies being able to access fresh capital. But with new fractionation capacity starting to hit the market, such as Oneok’s new facility, and just last week, Enterprise’s Fractionator 10 unit rumoured to have started-up, propane production is heading higher. This is what’s grabbing the attention of market players, as they see more volumes in their purity form being produced against a backdrop of stagnating, at best, U.S. domestic consumption, and the reality of constrained export volumes. It’s amazing to be writing this SIMON SAYS knowing that the net-back propane numbers in the U.S. Gulf are over 30 cent/ gallon and yet the propane price is falling relatively to WTI crude oil.

The market is crying out for exports at a time when exports overall are struggling to even maintain recent levels, mainly as a result of cutbacks in the Middle East and the inability of the U.S. export terminals to make up for the difference. Saudi Aramco have imposed cutbacks and delays in their January lifting programme, and this appears to be rolling through to February. Other Middle Eastern producers are unable to bridge any gap, with delays of their own adding to the shortages. The sure sign is evident in the shipping market, where trader relets are now numbering 5/6 and the forgotten words “Open Prompt” are starting to appear again on expanding shipbroker’s lists. Owner’s are doing well to hold levels, currently in the mid $60s/ Mt for the Baltic’s Ras Tanura to Chiba voyage. This is also backed up west of Suez, with freight levels coming under increasing pressure, dropping back below $110/ Mt, despite the ever widening ARB levels. However much cheaper freight and widening ARBs try, they do not appear to be helping to suck out any additional export cargoes in either region. Focus has now switched to a solitary Algerian spot FOB propane cargo, likely to attract a great deal of interest.

So the joy of being a ship owner during most of 2019 is quickly turning into relative discomfort, yes rates are not falling like a stone, more slipping gradually, but the ship owner is more focused on his time-charter equivalent numbers. With IMO 2020 fully operational, bunker costs have soared, with levels in Asia up by nearly $200/ Mt in the last month, significantly eating into the ship owner’s time-charter returns, with Ras Tanura to Chiba voyages now below $1 million for monthly time charter equivalents, although the west of Suez levels are still maintaining a premium, but they are struggling to keep above a $1.25 million time-charter equivalent, unless they are the more modern economical types. Then add the likely hikes in war risk insurance premiums in the Middle East and it’s certainly not the ship owners who are ruining, or for that matter enjoying the party.

Is there any light at the end of the tunnel? Well, I was getting the impression by the year’s end that the market was starting to run out of steam, with the January Saudi Aramco CP for propane being set at least $10-15/ Mt above expectation at $565/ Mt, causing buyers to start to back-off a little. Yes they are concerned about supply issues, but it’s not as if winter demand is pushing them into any continued buying frenzy. Pertamina yet again decided not to award a tender due to offers being made at levels higher than expected, and re-issued on slightly later dates. Chinese propane dehydrogenation buyers have also gone into maintenance mode for January, as incremental volumes were just not available, and chasing tons at higher and higher premiums wasn’t making a lot of financial sense. We are also starting to approach March arrivals, with buyers starting to move away from winter mode and beginning to look more closely at petrochemical economics rebalancing the market. Therefore the strongest bidding will have to remain at the front of the curve

What is for sure is that with impeachment around the corner, the actions of the U.S. and its President over the coming months, are unlikely to provide us with any dull moments for quite a while in the geopolitical arena, but especially as they impact crude oil movements in the Middle East. Oh yes the U.S./ China tariff war looks as if it may well be forced to drag along as well. All this is not good news for buyers in Asia, but it’s very good news for those FOB contract holders out of all the U.S. export terminals, as long as the cargoes they have aren’t committed. Oh by the way did I mention the fog is back.

As we start the new year I’m planning to reduce the number of SIMON SAYS blogs I’m producing. I’ll still bring one out at the start of the week, and then if an interesting topic pops-up in the week I’ll also try to cover it in an ad-hoc blog. Let’s see how things go.