One thing is for sure, you can never take things for granted these days, and you can see it in the growing number of “U-turns” being performed by governments, organisations and certainly the Mums and Dads of the world. Every time it looks as if normality is returning, albeit in its newest form, something appears to disturb the equilibrium. At the centre of this, without doubt, is the coronavirus pandemic itself, and until we know more certainty, find a vaccine or just live to cope with it, the need to change course will continue. It is this “stop, start, and reverse” syndrome that plays its way beyond just the simple physical health of a nation, and into the decisions being made for its ultimate economic well-being. Only last week I was feeling that the return of incremental demand before the onset of winter, however small, was going to be an upbeat undertone for the LPG market itself, but maybe I’ll also have to surrender my thoughts to the power of the “U-turn”!
I’ve tried to feel positive about where we are heading along the economic curve, but as countries around the world face a new surge in infections, and consider the likelihood of new, and probably more focused lockdowns, the economic clairvoyants are again changing their tone, expecting matters to get worse before they get better. The global economy may have bumped up, but without coronavirus closure we keep seeing the drag on economies, caused by businesses literally shutting up shop, workers losing their jobs, and banks facing rising levels of bad loans. Last week EU market regulators were warning investors not to get caught up in the risk of economic disappointment. I don’t know what you think, but prices appear to have become untethered from any sort of economic reality. All the money that governments around the world are pumping in, is just finding its way into the stock market and commodities. But are we seeing those with their fingers on the cash doing their own about-turn?
The U.S. stock markets led the way this week, with the tech sector taking the brunt of the losses. But it had all got hyped too much, as investors pumped cash into the sector, betting that more businesses would permanently move on-line. There had also been a $50 billion bet made by Japan’s SoftBank. But a change in direction has led to a sell-off, as momentum came to an abrupt stop. Yes it’s market flimflam, but coronavirus snippets keep on changing people’s perceptions of what will happen next. Commodities, including crude oil and LPG, have now joined the conga line!
On Friday WTI fell below $40/ Bbl for the first time since June, mainly in concert with the weaker financial markets, but noises of a stuttering demand rebound gathered pace, aided by data showing that China’s appetite for crude oil imports in August was declining, from 8.2 MM Bbls/d in July to under 8 MM Bbls/d . They key being that the second quarter average was nearer to 12 MM Bbls/d, and even if it only drops a couple of million barrels a day, it’s a big drop for a global market hoping for China to lead the world up the economic “V” curve. The fact is that the Chinese economy is no longer doing as well as expected, falling more in line with the rest of the world. In addition U.S. gasoline demand, as well as other petroleum products, fell from week to week according to EIA data. Any confidence in a recovery of world energy demand also appears to have taken a turn!
The LPG market has seen a week in which everybody’s been looking at each other, in a virtual sense, wondering if they too have an unplaced cargo (a kind word compared to unsold), hidden in their system. Second half September arrivals in Asia have taken the brunt of it, with the offer side slipping down to the very high twenties negativity to September FEI, dare I say even $30/ Mt. Maybe a cargo was done at this level, maybe not, but it had disappeared (sorry the kind word is placed) by mid-week. October wasn’t much better, and the roll of first half into second became more active, albeit at a hefty cost, as traders attempted to balance their position books as best they could.
The prompt market into Asia appears to be dominated by excess supply, some might say it’s driven by weak demand, which of course I go along with to a certain extent, but why do we now appear to have reached a tipping point? I think there are a number of factors to consider. A few weeks ago the market got a little more optimistic on the back of stronger crude oil prices and lower refinery runs, coupled with higher propylene and ethylene values, filtering through to higher petchem margins for propane. Focus of attention shifted to Europe where U.S. netbacks pushed above those to Asia, mainly fueled by the concentration of flexi steam crackers. It felt as if it was driven by more optimistic demand in Europe, and maybe not the fact that Asian demand was stuttering. Also values in the U.S. were expected to improve given higher domestic petrochemical demand, especially for propane, and the impact this would have on potentially narrowing the ARB, making cargoes loaded a little more valuable in the trader’s mind, particularly given theoretical cancellations building up around them, and winter approaching on the horizon.
Maybe our foresight for the market has also been twisted by feelings that there would be a drop in export supplies from the U.S., bolstered by a raft of cancellations in August and September. But the market is unclear as to whether reports of cancellations are factual or not, and have those cancelled cargoes simply been reincarnated as new exporter stems. Without doubt U.S. Gulf terminals appear to have been loaded-up with reinstated slots, something they were never keen to do when fees were up in double digits and cancellation charges were not too shabby. In difficult times double dipping, combining lower cancellation fees and slots being re-sold, isn’t too shabby for the exporters either! And let’s face it, when cancellations appear, so too does a flotilla of VLGC sat in the close vicinity of the U.S. export facilities, something that just hasn’t materialised this time round.
I’m sure I will be told that last week a cargo was sold by an exporter at 4 cents/ gallon, so surely there must be demand out there! But hold-on, the buyer is rumoured to be a ship-owner, which more than likely means the demand is to fill a potentially open VLGC, to help ease for the ship owner any downward pressure on the freight market. This isn’t an end-user like Pertamina or Dow buying out of the U.S. Gulf, and it’s not just the ship owners at it, the traders with open ships, or visions of a winter market, have been doing the same. You see, when you buy a physical cargo, and you have a ship, and you’ve hedged that cargo through to Asian pricing via the ARB, you’re covered. That’s as long as paper FEI time spreads keep pace with physical premiums and discounts. So sellers are able to load up with cargoes, hedge them, and what results is a potential armada of unsold cargoes arriving in Asia in second half September and October. If additional winter demand is there, then great, but it isn’t. The market is therefore over-supplied, weak demand is only part of the story! So when FEI paper time spreads for September/October are valued at minus $20/ Mt and physical discounts are nearer $30/ Mt, you can see the problem developing.
I think the talk of the next “U-turn” might well be replaced by traders rushing for the nearest “U-bend”, sorry for lowering the tone, but markets can do this to you!