Do you remember the repetitive song by The Police, unimaginatively called “De Do Do Do De Da Da Da”, with that elegiac verse “Poets, Priests and Politicians”? Well, I’m probably not thinking of the priesthood at this particular time, but I have a few words to say about “Pundits and Politicians”! However you might be viewing the current LPG market, you’ll have to have an eye on what stage we are presently at in the chronology of coronavirus, and what’s being said. We might have live sport back on our TVs, but the competitiveness of science versus politics, COVID-19 versus business, and now market soothsayers versus energy traders, is starting to add interest to what is a pretty dull summer market. One party certainly appears to be saying the opposite of the other. Boris wants office workers to go back to the ghost town previously known as the City of London, but the scientists want them to work from home. LPG experts were claiming we were in a weak bear market, but now a few bulls have started roaming the empty streets!
The story really begins on the trading and operation desks of the major buyers from the Middle East. They too had been listening to the bearish tones echoing around the market in the last few weeks, and were being enticed by a degree of moderate contango to nominate August loadings towards the back-end of the month, closer to pre-winter buying and closer to higher paper values. Then we get the acceptances from the Qataris, Saudi Aramco and ADNOC, and all look as if they’ve brought a number of those nominations forward. Okay, exporters need to have a roughly evenly spread lifting programme, so it means you don’t always get what you wanted, but it also suggests that exporters in the Middle East have a lot more LPG they want to move. We were coming to terms with the news that OPEC+ were easing the severe production cuts of a few months back, as demand has started to edge above supply, but to see it ripple through to LPG exports so quickly was surely bearish news for the market. With reports that Saudi Aramco were only 3-4 cargoes per month short of their “standard” monthly export volume, additional spot tonnes in Kuwait, as well as a couple of cargo re-sales popping in the market, you would think the prices might be on the slide. But what do the so-called experts really know, by the end of the week August CP swaps had sharply surged by over 5%, flipping contango into backwardation.
We had pretty much written-off a resurgence of buying interest in Asia a few weeks ago, but suddenly a pack of buyers emerged to purchase August delivery cargoes, giving the Ginga market a bit of an upward zip to it. The week started early with 23,000 Mt of propane lots changing hands in the low to midd’ish negative teens for first and second half August delivery, but by mid-week the market had bounded up to around FEI minus $7-8/ Mt, as the paper numbers started to give the market a push. By the end of the week rumours were suggesting that minus $5/ Mt had been done, with a full 46,000 Mt cargo securing a discount below $10/ Mt. The bears retreated and the bulls started shouting more in the market, with talk of split cargoes being sold into China, two new Chinese PDH facilities, as well as a new olefin cracker in the north, in trial/start-up phase. Oh yes, the Chinese GDP numbers were better than expected. But it’s easy to get carried away, and there’s a lot of pain still to come, economically as well as with the direct impact of coronavirus.
One big worry remains the U.S., where again the medical experts, although it always appears to be that guy Dr Fauci in the firing line, are at odds with Federal and state politicians. The drive has been skewed to getting the economy running, but the odds of further lockdowns seem to be shortening. From an LPG perspective, the heartening news has been focused on the production side of the equation in the U.S., with production numbers moving above 2.25 MM Bbls/d, and above the level we were seeing this time last year. That’s good news for U.S. exports, and again it should be bearish news for the international market. Propane inventories jumped by 3.5 MM Bbls according to the EIA numbers this week, as we again approach five year stock highs. With this news came a widening of the ARBs, hitting the $100/ Mt mark for September, and not far off the same number for August. The propane to crude oil ratio slipped below the 50% evaluation, which is again an encouragement for Mont Belvieu prices to reach export boosting levels. Certainly by close of play on Friday there was talk of export re-sale numbers above 5 cents/ gallon out of the U.S. Gulf, as well as deals to boot, but the paradox is in the export figures coming out this week from the EIA number crunching and forecasting machine, again below 1 million Bbls/d. And that’s with a rush of exports out of the Marcus Hook facility, nearly a dozen a month, as Marcellus and Utica production recovers from the slide in natgas and crude oil prices. But as always we are more interested in the future not the past, aren’t we?
So I know you’re all asking how those poor ship owners are doing, well they appear to have weathered the storm, as time charter equivalents have returned to above $700,000 per month, not quite the $2 million levels of a year ago, but at least the bills can be paid a little easier out of cash flow, and don’t say I didn’t tell you that freight rates were about to move higher. Now was it the ARB that pulled up the freight levels, or was it the freight that widened the ARB, I would probably sway in favour of the freight push. Yes, the spark in demand in Asia, coupled with bearish stock and production numbers in the U.S., and for that matter the Middle East, has widened the ARB, but with no reported August cancellations in the U.S. and earlier dates out of the producers in the Middle East, there’s been a scramble for ships, and more importantly ship’s “dates”, with the fixing window coming forward from recent weeks. When you add-in delays to discharges in EC India, the timing impact of ships taking the Cape route, as well as BW’s cargo purchasing activities, and also uncertainties remaining on dry-dock schedules for the ships coming of inspection age, no wonder the talk in the west had pushed rates, struggling to hold at $60/ Mt, up to the heady heights of $70/ Mt by Friday. Even the Baltic jumped 25% in a week, albeit from a very low base.
So as we happily talk about a little more bullish news in the LPG market, we must still be aware of the coronavirus threat. As the U.S. driving season should be reaching its usual summer peak, we’re hearing that figures recently released are showing drops of 5% in each of the last two weeks. India is also struggling to get to grips with bulging daily infection numbers, and South America looks to be in the midst of the worst phase of the virus. But, as we spoke about at the start of today’s blog, whatever the scientists say, the politicians are now more worried about the economy, and the two don’t necessarily fit snuggly together.