SIMON SAYS: The writing was on the wall

Submitted by Simon Hill on Sun, 01/17/2021 - 17:00
The writing was on the wall

As 2020 was the year totally dominated by coronavirus, COVID-19, whatever name you choose to call it, 2021 will surely be liberated by the “vaccines”. Yet confinement, lockdown, stay-at-home orders, that are so prevalent today in many industrialized countries of the world, are the response to what is clearly the most serious phase of this pandemic. It’s visibly showing that we believe positive change is on its way, and our ability economically to ride the current storm is proving to be far better than April’s 20% collapse in global economic output. Governments are arguably doing a better job (don’t forget it’s all relative!), are thinking ahead economically, while at the same time struggling with the daily management of the virus, businesses are also adjusting, and people’s fear is reducing.

The positive vaccine news has clearly initiated the bull run we have been seeing on crude oil. The likelihood of OPEC+ restraining output into the mid part of this year, together with Saudi Arabia’s unlikely cut of 1 million Bbls/ d, has certainly stoked the fire. Then add in the better demand news for petroleum products, especially in the U.S. from the second half of the year, continued dampening of any over expectation on U.S. shale production increases, and there’s no surprise Morgan Stanley and Goldman Sachs are predicting $60s/ Bbl, sooner rather than later. But LPG tends not to follow the same pattern, nor the same time line, albeit its every move is influenced in some way or another by its big energy brothers. We had already spotted last week that the LPG world was about to change, and this week it did just that! So every LPG trader that’s been basking in the upward trajectory associated with a cold Asian winter, has now to grapple with the immediate concerns of narrowing ARBs, and a severely backwardated FEI curve, as well as the upcoming seasonal change, and all those other economic and geo-political scenarios a world dominated by reducing the impact of coronavirus has to offer.

Cold weather has maybe not yet piled into the eastern part of the U.S., but shivers have been felt down the spines of a number of Mont Belvieu traders. They’re fixated with exports at the moment, fearing it’s impact on propane inventories, especially when doubled-up with another 9-10 weeks of draws still on the cards. December appears to have been a record export month, and although January exports will not be as high, they’re unlikely to be that far below either. Ships are fixed, cargoes have been hedged, and even EIA export numbers have jumped back to over 1.3 MM Bbls/d in the last week, and as stocks go down prices tend to go up, and this week’s been no exception. Throw in some good news on interest rates from the Fed, their comments on trillions of fiscal and federal stimuli, backed-up by the President-elect, a stronger WTI, and Mont Belvieu propane prices have gone off to the races. As crude oil gained 1.25% on Thursday, propane was up 4%. Conway has also posted prices higher than we’ve seen for nearly 3 years.

At the same time, the wobbles in the east have also taken a turn. Breathtaking rallies in liquefied natural gas (LNG) and LPG prices were set for a fall, as cold spells give way to forecasts of milder weather and lower heating demand, as well as more supply around the corner, but there are signs that LPG demand still appears to be out there as bids dominated the Ginga window, albeit at lower levels and for March delivery. PDH margins are still positive but only just, and with different plant set-ups/ costings, some will be unlikely to continue at recent running rates. The problem this all brings is that the FEI price is struggling to keep pace with its Mont Belvieu counterpart, made worse by the gradual narrowing of the WTI/ Brent spread, and that’s meant curtains for the ARB, or to be more in tune with terminology, the ARB is closed. Whereas the propane price in the U.S. has jumped 10% in a week, the FEI for February was $633/ Mt at Monday’s close, and was still there at the same time on Friday.

Movement in the cash differentials, the spread in this case between one month and the next month’s FEI, has added to the week’s thrills and spills. As a general rule I’ve been brought up to generalize that a backwardated market, where prices at the front of the curve are higher than the following month(s), clearly show prompt demand greater than supply. So if the differential between February and May 2021 increases from $132/ Mt to $146/ Mt, shouldn’t I be thinking this market still has some fuel left in its tank? In a way it’s the market in Asia fighting to try and keep pace with the movement in spot prices in Mont Belvieu in light of the underlying index struggling to match Brent’s strength.

So the U.S. is up, and Asia is down, in relative terms, and that’s why a February ARB touching $200/ Mt at the beginning of the week dropped more than $40/ Mt by Friday, even with a little end-week upward blip. Now ARBs can still be open at $150/ Mt or $100/ Mt, but not if the freight from Houston to Chiba is being offered on the basis of $3 million+ per month time charter equivalents. The question became which would give-in faster, the ARB or the ship owners? As those watching “Bridgerton” on Netflix might have seen, amongst things they probably should not have seen, there’s nothing like a good old gentleman’s duel! I know calling ship owners gentlemen is maybe going a little too far, but in this type of duel they tend to come out the winners, at the start anyway!

Prices tend to give-in a lot faster than ship owners do, but with record freight levels, some form of correction was bound to be on the cards, and as prices caved-in, open positions in the Middle East started to appear, and they were dominated by trader re-lets. As we have discussed before, when traders see delivered prices coming under pressure, but freight rates holding-up, they try to sell, swap or conjure cargoes to disappear FOB, seeking their profit in re-letting their ship. Slightly ungentlemanly in the eyes of the ship-owners, as traders are more likely to drop their rates a little, especially under the pressure of prices falling all around them. Then add in the crude production cuts announced by Saudi Arabia, with the potential of less LPG cargoes, and rates start to get hit, whatever reluctance ship owners might show. Hence the Baltic slipped from just under $120/ Mt to under $109/ Mt in the week.

In the U.S. freight enquiries dried up completely with the contracting ARB, while delays transiting the Panama Canal eased a little, bringing forward a few more open shipping positions. But as I’ve said, ship owners are always reluctant to give-up on the freight rate gains of recent months, and kept reminding brokers to stress that last done was $175/ Mt. But with ARBs struggling to hold-up much above $155/ Mt it doesn’t take a genius to work out that the ARB was on paper, significantly negative.  Most re-sellers tend to cancel their cargoes if it has a 4 in it, that’s a positive 4 cents/ gallon. So reports that cancellations of 4 to 10 February cargoes, maybe more maybe less, became widespread, and guess what, the FEI market began to spring back to life a little on Friday afternoon, as concerns grew about March cargo arrivals in Asia. Maybe those cancellations may also spring back to life?