SIMON SAYS: The pendulum keeps swinging back and forth

Submitted by Simon Hill on Mon, 11/18/2019 - 17:00
The pendulum keeps swinging back and forth

It’s looking as if it’s been another one of those weeks in the LPG world, where defining a forward view of the market could go one of many ways, and the backcloth is an ARB market that initially headed south but has now regained some broader momentum. In today’s SIMON SAYs I’ll take a look at what the key indicators are up to, and what has happened to them over the last couple of weeks, to see if there’s a clearer direction going forward, as cargoes are starting to be talked for the January 2020 arrival period in Asia.

Yesterday I addressed what was happening in Conway, Kansas, especially how recent cold weather was influencing the spread with Mont Belvieu, and I know most of you living outside the U.S. would be saying, what has this got to do with the international LPG market. Well, its importance is that we’re trying to evaluate what pressures in the U.S. market could keep Mont Belvieu pricing strong, or for that matter push it the other way. What was evident yesterday is that despite concerns about production, it still looks as if the supply side of the U.S. NGL industry is dominating demand, and while this continues, the U.S. side of the ARB equation to Asia will be subtly doing its utmost to keep export cargoes flowing.

Last week we were thinking the unthinkable, that if the ARB continued on its path, then we were getting closer to potential cancellations, and all that would mean to the various rudiments of the international LPG trade. But despite sentiment swinging back and forth, the December ARB is back up challenging the $180s/ Mt, led mainly by demand strengthening in Asia. There’s been buying interest in the second half of December, it feels a little in limbo, but then could we really expect much more so quickly, after it appeared Asian demand was in trouble, showing signs of being overcooked. The drop-in prices may well have influenced buyers in Asia to at least cover their remaining positions for the balance of the year, and this has encouraged the bounce. To be honest what else has changed?

The supply scenario out of the Middle East appears to be improving, I still feel there is a lot of work that remains to be done fixing the damage caused by the September drone attacks in order to get LPG production in Saudi Arabia back to where it was, but clearly work is progressing. Also, Saudi Aramco acceptances showed very few delays, and there were even rumours that there might be spot availability, but whether this is the result of more production, or nominations easing in light of demand cooling in India, is difficult to say. Anyway, Kuwait ended up selling its mid-December cargo at a discount, and that’s about where the market has meandered to.

I’m also confused on Iran, and whether there are still cargoes moving with any regularity to China. I hear conflicting reports, and probably logically there aren’t ships sat in lay-up, nor are ships clearly en route from Iran to China either. But I do see the increasing agitation on the streets in Tehran over the weekend, caused by gasoline shortages and price hikes, which paints a very disturbing picture, and must surely mean that sanctions are biting, of course not solely related to LPG.

Europe has also shifted from cargo length to having only bids appearing in the European window, and premiums edging past the mid-single digits. But the market is thin and was dominated over the last week or so by a, “will they, won’t they”, cargo of a large petrochemical buyer. Clearly, they’re not selling! What it does tell us, is that apart from U.S. cargoes being re-routed, it’s unlikely we will see European cargoes heading to Asia, not for the balance of this year, though one is heading to the Mediterranean. It’s also quiet in West Africa and Algeria, although we’ve seen a couple of ships fixed out of Australia and the usual Escravos, NLNG cargoes causing a little confusion out of Nigeria. Therefore, extra cargoes will be dependent on the U.S., Middle East, and yes, ship values.

Although I was expecting to see freight levels ease off as the ARB narrowed, cancellations became a realistic option, and re-lets began to appear, none being good news for any ship owner, even in this very heady market. So, there’s been a bounce as the ARB has widened, fixtures always help and a couple were concluded last week, but it’s no rush, and numbers slightly below $130/ Mt seems to be the order of the day. We are now getting ships arriving in the U.S. Gulf that took the punt, moving west from positions off Singapore and Galle, and a few are still open in second-half December, but with delays still causing concern, there’s no reason for a double dip. In fact, the premium enjoyed over Baltic on the Houston to Chiba route has been pretty much cancelled out by the cost of the Panama Canal delays, especially on ballast, and winter routings taking longer. In fact, Baltic numbers might be on for another move up into the $80s/ Mt levels, as ship owners flex their muscles, but by the end of the week traders were looking at re-lets, licking their lips at anything near $80/ Mt. We’ll need to keep our eye on Saudi production normality and more VLGCs popping into dry dock to get their scrubbers fixed, or taking time, off-hire, to clean their tanks of IMO 2020 non-compliant bunkers in preparation for the low-Sulphur variety.

So as the week progressed the net-backs in the U.S. Gulf started to recover, and numbers began to be talked in the high 7 cents/ gallon to mid-8s, but it was no rush again, and it still looks more and more as if the extra exports promised for the fourth quarter have at best been a damp squib. I know Horatio Nelson said “I see no ships” at the Battle of Copenhagen, but Simon Hill is saying “I see no new slots” and therefore “I see no extra ships”. While mentioning Copenhagen, I have to refer to the sad and sudden death of Andreas Justesen, who was Head of Poten & Partners LPG brokerage department. Andreas had started his career at AP Moller, he then joined Contichem, before moving over to SwissChemGas in Athens, following the company’s sale. He will be sadly missed, and for me his love of Manchester United made every chat we had go way beyond LPG.

It’s time to sell the virtual cargo we have loading next week in the U.S. Gulf. I don’t at this stage see any additional premium, and therefore, because we will be selling a full cargo of propane, it’s likely we might have to give up a dollar or two in the process. The key though will be unwinding the hedge, and hopefully ticking off on some profit to begin with for our first virtual physical cargo. But that might not be the end of the story. Check-out Trade Secret that’s due out tomorrow. In the meantime, wrap-up if it’s getting cold wherever you are, especially if there’s no drive-through Dunkin Donuts!