SIMON SAYS: On the one hand the U.S., on the other hand Asia, but what’s in the middle!

Submitted by Simon Hill on Mon, 11/11/2019 - 17:00
On the one hand the U.S., on the other hand Asia, but what’s in the middle!

The beauty of the U.S. NGL market is that it’s full of statistics, in fact, America does statistics very well, just take a look at American sports and you’ll see why. With so many numbers to digest in the NGL world, it tends to draw our attention to the U.S. more often than not, maybe too much. Not surprisingly it does influence what I see and think, and I’m starting to believe the U.S. has taken over as the driving force of the whole international market. There’s still a huge volume of LPG flowing out of the Middle East, but the market is still distorted by the monthly Saudi Aramco CP, and a lot of the movement on CP in the forward market, although relating to FEI values, still feels like what it is, a monthly price, with a long pricing procession leading up to it. But it’s just so difficult to see how the pricing mechanism is good value, as we usually find it practically impossible to equate CP with freight and the buying price in Asia. The U.S./ China tariff and the drone attacks on Saudi Arabia, together with the export decline in Iran as a result of tighter sanctions, has made China import prices look closer and closer to CP plus freight. But that looks, with the talk of a pending tariff agreement, as if it is all going to change anyway, or maybe it’s only a touch of deja vu. So, as I see the CP strongly influencing numbers in Asia, and the U.S. market taking the international lead, what’s the link – the ARB of course!

In yesterday’s SIMON SAYS we focused on what’s happening inside the U.S. market, and it mainly looked bullish, except along came the EIA numbers midweek, and exports are down, and the inventory is up, albeit small, but still the best part of 1 million barrels higher than most of the market pundits were predicting. While the Mont Belvieu structure has been strong for a couple of months now, at least up to last Thursday, the Asian market has been even stronger, as the end of the third quarter saw the attacks on the Abqaiq processing facility in Saudi Arabia, the U.S. getting after the Chinese ship owners lifting out of Iran, new second phase Chinese propane dehydrogenation (PDH) plants starting-up, Indian demand surging, Indonesia short of contract volumes, and of course the continuing spat between the U.S. and China over import tariffs.

But nothing stays the same for long, does it? We have seen in the last couple of weeks a big change around, as Asian buyers started feeling they had overindulged in buying a few too many cargoes. Storages were building higher, offtake domestically was below expectations, something we have seen clearly with a drop in interest from the Indian market, and from non PDH buyers in China. The price increase has clearly shown that any future LPG market development has to come from LPG prices staying attractive and remaining below other substitutes.

In addition, we are coming up to the end of year stock count in a lot of import countries, especially Japan and Korea, and importers appear keen to avoid over purchasing, which is potentially pushing down price levels, just before the accountants take over the numbers and start crunching. But it’s the market that’s talking about sluggish demand, ample supplies, and more coming, it can only have one impact. So, as the Asian market puts the brakes on, the strength in Asian structure started to get forced down, especially at the front. As Asian prices started to fall faster than the strong U.S., the ARB got squeezed too. The Arb fell from circa $200/ Mt for November to just above $170/ Mt by the mid part of last week. It’s seen a small bounce after the EIA stock build was announced, but it’s only just above the mid $170s/ Mt. What’s also a little worrying is that the “Ginga” window has been pretty much dormant for the last week, with hardly any bids or offers. I don’t think the market is entering any prolonged period of weakness, but it is certainly taking a breather.

The normal order of events as far as the LPG world is concerned, is that once the delivered market starts to get the jitters, then the traders with cargoes and ships look to de-couple. The belief is that the product numbers tend to move down faster than the shipping rates, in reaction to a change in the delivered price levels. If traders see that selling a cargo in Asia is likely to become more difficult over time, and the delivery period for their cargo is still some way off, then it makes sense to trade the more current market, i.e. FOB  cargoes in the U.S. are currently being transacted for loading in early December, but the Asian market is still only looking at second half December deliveries and won’t start to look at early January arrivals for at least another two weeks. Anything loading in early December in the U.S. Gulf is a first half January arrival in Asia. Traders are always accused by the ship owners of undercutting the market, but by inference that also means that ship owners tend to try and hold freight levels higher for longer. If the ARB starts falling there might still be the chance to sell the physical U.S. cargo at say a 2 cents/ gallon ($10.42/ Mt) loss on the market, re-let the ship at $5/ Mt loss, and then get out of the ARB paper hedge as close to a $20/ Mt profit, if not a little more. The aim being to take another $5/  mt or more out of the deal. It’s very specific to the trader’s position, but it also shows how there is flexibility in the international market to swing cargoes around, appearing to reduce cargoes unsold in Asia, and transport them, temporarily maybe, back into the U.S. market.

Just over a week ago the brokers were compiling their forward November U.S. export programmes, and the words that came out were, “we’re looking at a potential record export month”. Now that’s not what buyers in Asia were keen to hear. As it became clear that more cargoes were heading east, and arriving before the end of the year, the impetus in Asia was gone. Talk of a resolution on the U.S. / China trade war is not going to help either. However, even with this narrowing of the ARB, we are still not at cancellation, in fact the bounce back has again made moving cargoes to Asia possible, certainly on paper if not physically. Add in the fact that the freight market has come off its highs, and back to levels closer to the lower $120s/ Mt, and with it the talked levels of terminal fees down, even though they edged up a little at the end of the week to somewhere in the 7 cents/gallon range, and the ARB is therefore still open.

We’ve decided to hold onto the physical cargo, splitting up is marginal and a lot more can happen to this market. But we think freight might start to drift sub $110/ Mt over the next few weeks as December interest slows. Trade Secret will reveal all!