SIMON SAYS: Ships that Pass in the Night – a Reality Check!

Submitted by Simon Hill on Sun, 09/20/2020 - 17:00
Ships that Pass in the Night – a Reality Check!

It’s often said that markets take on certain characteristics one week, only to depart from their course the next, as if the factors determining the way the market is behaving disconnect, and go off in their separate ways. The line “Ships that pass in the night” comes from The Theologian’s Tale by Henry Wadsworth Longfellow, and it might be pertinent in more ways than one this week, looking at both the physical movement of VLGCs in Asia, and the driving force behind the direction of the LPG market, again you guessed it, the price of crude oil!

After last week’s fall off in the crude oil market, prices have jumped back above $40/ Bbl, with increases not far off 10% for both Brent and WTI. I must admit I didn’t see that happening so fast, especially with the global demand concerns amplifying, as COVID-19 takes yet another upward turn. But all of us in the energy sector like to feel we can see and touch the issues causing markets to move, and global demand tends to be a little ambiguous, too complex, too baffling, knotty and perplexing. Give us the more meaty supply factors to try and unravel, and we are a lot more comfortable.

So when OPEC, and its non-OPEC allies, hold an on-line meeting to review the market, and discuss compliance of those who had signed up for the deep production cuts, we all sit-up, take notes and make an impact call. The judgement appears to have been bullish, as Saudi Arabia’s Oil Minister, Prince Abdulaziz bin Salman, again used the gathering to publicly press non-compliant members to stick to their pledges on production cuts, following measured success with Iraq, Nigeria and the UAE over the last few weeks. This had followed U.S. stock data showing a drawdown in crude oil inventory, mainly resulting from Hurricane Sally’s slow movement across the Gulf of Mexico, enforcing longer than usual production shut-ins of around 0.5 MM Bbls/d. In the meantime Vitol came out with a bullish signal, believing that stock drawdowns were going to become more common, Citigroup forecast $60/ Bbl crude by 2021, and although much lower at $49/ Bbl, Goldman Sachs fanned the bullish flames further. Thank goodness for some newsworthiness supply pointers to overshadow BP’s pessimistic outlook suggesting oil demand had already peaked.

So, the change around in the direction of oil prices immediately hoisted-up the front of the pricing curves, compressing the contango over the balance of 2020, but still a distance away from flattening a curve that should be starting to edge itself into backwardated territory. As Asian markets move closer to winter, and second half October deliveries are now more in vogue, the talk last week of discounts heading into the thirties has reversed, with any cut-price numbers more likely to be in the teens. It’s still not as bullish as some players would like, but with a cargo bought into Taiwan, Middle East spot FOBs being awarded, not cancelled, and Saudi acceptances showing cutbacks, there was a feeling that demand concerns were being overshadowed.

But, back to ships passing in the night. It’s been interesting to look at ships hanging around in Asia, fully laden VLGCs, waiting to discharge. It’s certainly a sign, but you may ask it’s a sign of what? The current shipping economics, where time-charter equivalents per month are closer to $1.5 million, gives absolutely no incentive to the charterer/trader to park their ship and lock-in the forward contango. Even at $20/ Mt it only accounts for around $900,000 of additional revenue, and that’s before the other costs associated with holding cargo on-board are applied. But late August/ early September saw a number of ships hanging around in both SE and NE Asia. Ships with full cargoes still on board, or having discharged only half of their loads. Caravelle, BW Frigg, BW Leo, Vega Sea, Dorset, Leo Green, Clermont, BW Oak, Gas Alkhaleej, Berge Ningbo, Sea Bird, BW Libra to name more than a few, have been waiting for five, ten, fifteen or even twenty days. The driver hasn’t been the contango market, it’s more the lack of discharge options in Asia, as well as buyers unwilling to purchase cargoes. With traders less willing to cancel U.S. FOB cargoes than had been expected, or with exporters re-selling cancelled stems, VLGCs were performing the first part of their voyages, against hedge pricing and cost economics. The  arrival timings were not matching the contract delivery laycans, or cargoes had simply not been physically sold. However, according to figures from Anfil Maritime, the number of laden VLGCs in Asia at anchor, or drifting, are starting to reduce, signifying that the bottlenecks caused by lower demand and higher stock levels are beginning to be dislodged. It’s still early days and Chinese ships finally entering Chinese ports appear to be the ones moving first. If you want more info check out the LinkedIn page ‘Anfil Gas’.

As the Asian market appears to be a little more buoyant for the first time in weeks, and with crude oil prices having rallied, where has this left the ARB? With WTI on an upward trajectory during the week, and the EIA numbers showing a draw of 1.2 MM Bbls, against the expectation of a build of similar proportions, the Mont Belvieu complex gained strength, adding more than 2% above the equivalent jump in WTI. There was a fear that this would erode the ARB differential, but with the renewed optimism in Asia and Europe, the ARB held, if not widened a little. Re-sale activity was slow, but with a number of western re-lets appearing in the near-term, rates were pointing towards lower numbers, as charterers were heard bidding from the mid to high $80s/ Mt, against ship owners continuing to hold out for the mid $90s/ Mt. This sparked cargo re-sale numbers to move again above 5 cents/ gallon. With open ships in the hands of the traders it’s likely to keep the re-sale fees strong, and we could see close to 6 cents/ gallon next week. 

So, another week of change, change being the LPG trader’s dream (that’s as long as he has dreamt it in the first place!), but it appears there might be further help along the way for the stay-at-home trader, whose return to the office, the local restaurant and the thirst-quenching pub, might be thwarted by round two of the coronavirus pandemic and further potential lockdowns, local or national. We all know that the trading desk is the fundamental life blood of the trading psyche, enabling the individual traders to gather steam as markets move, screens ticker and voices are raised. Now, this has been somewhat missing with traders sat at kitchen tables, in front of real or pseudo book shelves, or dare I say it lavishly colourful bedroom suites, on ZOOM, Teams, you name it. Well fear not, Microsoft HoloLens devices are about to recreate the experience of the trading desk without the trader leaving the front door. 3D holograms coupled with pricing data, linked to and from other members of the trading team, will allow the trader to feel he is back where he belongs. Virtual reality headsets are clearly going to replace Zoom and other brands. But I wonder how long it will be before the “virtual” pub will suddenly appear at 1215, before a virtual table at Coya at 1300, and then maybe the portable drinks cabinet will no longer feature in the back corner of those Zoom calls that lack the continuity we see in the movies!