SIMON SAYS: Predictions: will we ever get them right!

Submitted by Simon Hill on Sun, 12/27/2020 - 17:00
Predictions: will we ever get them right!

Wherever you’re living in the world, we only have a few days left before the end of a bewildering year. I’ve just got through Christmas, I admit with a hangover, but this time it’s more my stomach’s position in relation to my trouser belt that’s agitating me a little. We’re now on that very British day; Boxing Day, which I won’t try and explain the meaning of, but it’s not as straight forward as you might think, and then it’s that weird week leading up to the New Year. Normally we would celebrate the end of one year and the beginning of the next, but given what we have had to live through, I think “seeing-off 2020” is more appropriate! You remember Brexit, well that seems to be all agreed with a 1500+ page document to boot, so 2021 may not be as uncertain in Europe as we were expecting, wink-wink!

Anyway, less of this general news drivel, as I’m sure you’re eager to find out what’s been shaping the LPG market in the last week. Well, don’t get too excited, nobody else in the trading world seems to have, as the week traditionally wanders aimlessly, and trade is thin, a word consistently found on my list of New Year’s resolutions! But I’ll give you a quick overview before looking forward to what might happen in 2021.

The penultimate week of the year is again dominated with coronavirus “ifs and buts”, as a mutating virus we discovered here in the U.K. is causing renewed lockdown/ demand concerns, especially as it appears to be a more virulent variant, and this took the buoyant crude oil market into an early week slide, only to spring back after the EIA reported a crude inventory draw of 600 M Bbls for the week up to 18th December. Refined products in the U.S. also failed to deliver the expected stock growth, another semi-bullish tone, so WTI might not end the year above $50/ Bbl, but it won’t be too far off.

The main concern in the LPG space centered on the gathering pace of uncertainty regarding sustained LPG demand in Asia, especially as the remaining heating days start to diminish.  This was certainly evident in the cash market, with the January/ February FEI (Far East Index) spread coming-in from low $40s/ Mt on Monday to lowish $30s/ Mt by the early close on Thursday. A similar situation was seen in a very thin Asian “window”, but position tidying pre-holidays could also have been a reason for the drop. Whatever the cause, the ARB market narrowed at least $10/ Mt from the previous week’s close, and although the freight levels for U.S. to Asia voyages had lost some of their gusto, they were still looking to end the year perched above $165/ Mt. With a shortage of available ships in late January and into early February, the steepness of the backwardation curve in Asia, delays in transiting the Panama Canal, and a few concerns loading in the U.S. Gulf, it wasn’t too difficult to see why FOB buyers ex Houston were not stepping up to the plate, pushing the bid/offer range below the already dwindling net-back calculations, and edging it closer to the point of cancellation. So it look like we’ll be starting 2021 with the same uncertainty we seem to get every year.

So, what should we be looking out for next year, I won’t say predictions as they may well come back to bite me at a later date?

Clearly we will still be living with the COVID-19 virus in some form or another, at least for the first half of the year, but hopefully things will get better as we hit the summer and beyond, with more and more of us receiving the vaccine. This I believe will be mirrored in the demand curve, and we are likely to see demand, whether perceived or real, react faster than supply, whether that’s for crude oil or LPG. The likely effect is a stronger crude oil price than many would have expected. At the levels we are seeing today, it’s likely that U.S. NGL production will start to improve, bolstered by an oil and gas rig count rising in all of the last five weeks, increasing the number by 40-odd rigs, a nearly 20% increase. Who said the U.S. shale patch was dying? This will again start to push-up potential U.S. LPG exports, albeit we seem to have had record 2020 numbers anyway. I still have my concerns about U.S. exporters capability to produce more slots out of the hat, especially if continued delays transiting the Panama Canal make arrival timings even more uncertain. But more exports from the U.S. is good for the ship owners, and it’s likely we’ll also see Middle East exports start to edge back-up over the year.

Despite the uncertainties of the world, I’m still fiendishly bullish on VLGC levels, even with the reaction to climate change and the questionable use of fossil fuels gathering pace. There are 40 odd new ships due to arrive over the next 2-3 years, but there are a similar number of 20+ year-old ships likely to find the requirements of climate change expensive, and the ability to compete with the ultra-efficient new-builds more and more challenging. The outlet may well be more floating storage, as time charter equivalents will keep these ships away from the knackers yard. Then take traditional ship owners, who are more willing to buy shares in other VLGC owners, evidenced by BW Gas’s move in buying the old Stolt-Nielsen stock position in Avance this week, than to invest their recent substantial gains into new buildings. The traders, although itching to be part of the ship-owning fraternity, are treading carefully, the odd couple ordered here and there, more interested (which I believe is right) in choosing the biggest and most economical size available. As the realities of the Panama Canal delays come home to roost, and I think next year they will, this will start to impact the LPG sector, as more ships will be enticed the long way round to Asia, increasing ton-miles. Then add-in the uncertainties of engine types and the delays to decision-making that brings, the likelihood more profits will be re-invested in retro-fitting than new builds, the difficulties of smaller companies accessing finance, and you have the makings of a continued bull run.

Otherwise our attention during 2021 will increasingly be taken by the words sustainability and renewals. There’s a big shift happening, okay the oil companies are probably saying more than they are doing, but it’s visible. I once stayed in Lysekil in Sweden on the way to visiting Texaco’s refinery in Brofjorden. Preem now run affairs and had planned to develop a residue oil conversion complex there, but at the last minute they went in favour of a large scale renewable fuel plant. Finland’s Neste are planning the same sort of conversion at their Porvoo refinery. Next year is just one year in a challenging decade ahead, but with Joe Biden looking to add momentum to the climate process, it could be an important year of direction. There are still huge refineries in Asia being planned and built, especially in China and India, many with integrated petrochemical facilities, but the ball is rolling, so it’s time to take note.

Let’s push for more gender and race equality in our business next year and for many years to come, it’s time! Otherwise, another year of ups and downs, where all we want to be is the right side of the move. In the end that’s what it’s all about. Happy New Year!