It’s so tempting to say I told you so, but it feels as if now is one of those moments, as the physical world for once is clearly calling the shots, and more importantly it’s shaping the market, especially as we near the pivot point, where the northern hemisphere winter begins. Forget for a moment what might happen in 2020, what the forward curve is saying, it’s all about what’s happening today, and it’s backing up what we’ve been saying now in a few SIMON SAYS in recent months, if you don’t believe me check these out: SIMON SAYS dated 9/22, 9/15, and 9/09.
The introduction of automated identification systems (AIS), that not only enhances safety by reducing the chances of ship collision, but also enables us to track ship movements, including those of VLGCs, by using their transponders, a portmanteau of the words “transmitter” and ”responder”, and the eyes of the satellites hovering above us. As a result, we are able to track ships leaving port, the routes they take, their speed and where they end up, it’s amazing! We can also use our practical experience of historical trades to assess the quantities of propane and butane that were most likely loaded on board. The ship-tracking figures coming through so far for the current month of October, look as if they are backing up what we’ve been saying since the drone attack on Saudi Arabia happened in mid-September, namely that the effect will be far greater on LPG exports than the impact on crude oil. After a 15 per cent reduction overall in September, it looks as if exports from Saudi Arabia could well end up being reduced by a further third in October. That’s a reduction of over 350,000 Mt of LPG last month, about 8 VLGCs in total. But that’s not the only reported cutback.
In just one month, already contracting Iranian LPG exports have dropped a further 50% plus, comparing September to October this year. The move by the U.S. and its allies, not only to make an arrest of an Iranian ship heading to Syria, but then to put sanctions on Chinese shipping companies, especially Kunlun Shipping, who had previously been linked in a Lloyds List article for switching their transponders off after loading LPG in Iran, in addition to performing ship-to-ship transfers to change the cargo origin, has without doubt been a significant factor in the export fall.
So, with all the rhetoric that’s been flowing around the energy world about how supplies will quickly get back to normal in Saudi Arabia, or that Iran will keep on exporting, come what may, well the evidence firmly points the other way, and is showing a significant monthly drop in export volumes from the Middle East.
You will also remember my doubts on whether the export capacity increases at Enterprise, in the U.S. Gulf, have actually materialised, as they were expected to, in September and for that matter in October as well. Even with the substitution of propane nominated tanks with normal butane, the numbers just don’t stack up. The only market talk about U.S. LPG export opportunities, has been on the re-sale of contract cargoes already nominated, with only the odd extra cargo seemingly appearing from P66 in Freeport. But this might also be a play with mirrors, as previous CFR cargoes into Asia on P66’s own ships have been switched to FOB sales, accompanied by reletting their ship, especially with high terminal fee premiums and a strong shipping market. If the U.S. export capacity was going to materialise, then we would be seeing up to 15% more export cargoes hitting the market, and more than likely spot terminal fees would come down and freight rates from Houston to Chiba would surely go up. However, terminal rates and freight levels just haven’t moved. It will be interesting to hear what Enterprise have to say about export capacity in their next earnings conference call scheduled for next week.
Therefore, with propane exports actually falling in last week’s EIA numbers, it’s clear that the U.S. has been unable to physically make-up the numbers to offset the contraction of supply out of the Middle East, with the exception being the reallocation of butane to replace half of the propane, especially those nominated for cargoes heading east. It’s also worth reminding ourselves that usually we see a few more cargoes start to come out of the Middle East in the winter anyway, as storages are normally filled by the end of the third quarter, spot sales reduced, and contractual lifting nominations are usually bumped up for the fourth quarter.
On the demand side we’ve been seeing strong sentiment for a while now, and with the confirmation of reduced exports coming out of the Middle East, together with the inability of the U.S. exporters to fully respond, you can see why. The daily trading window in Asia is not the perfect tool to fully expose the bids and offers in the market, but even just the odd bid and no offers can tell a lot about sentiment and perhaps the reality to follow. Likewise, if by magic, those who are short cargoes, probably on paper and a few physically, are having to pay up trying to cover their slight embarrassment, as well as trying to keep a lid on any big jump in premiums by attempting to conclude deals “off window”. Whereas we were talking single digit premiums only a few weeks ago, we are suddenly seeing second half November deliveries pushing closer to numbers beginning with a twenty. So, a buyer is prepared to pay nearly $20 above the average price for the month of November, that’s strong.
Other evidence to show how robust the front of the curve feels, is that the backwardation between November and December, whether on FEI or CP, is encouraging traders and importers to swap cargoes, exploiting the higher premiums in November by releasing their term liftings to spot buyers, and then taking cargoes back in December. Now that should dampen the November premiums, but there’s no sign yet of it happening. For me this is a clear sign of importers needing cargo or traders holding uncovered short positions, and sellers unwilling to give up volume by just selling. Clearly, they need the quantities in their systems for the winter. The cake might be being cut differently, but with a big bite already having been taken out, there’s clearly not enough to go around.
In tomorrow’s SIMON SAYS I’m going to try and piece together the picture a little more. Europe is again adding and subtracting from the puzzle, and I need to look at what has also happened in the shipping market, that again I eluded to previously, but in addition there is a new factor impacting shipping, especially in the west, that might well start to force rates up, even with the confirmed volume reductions in the Middle East. Therefore, where does this leave our fully hedged, but physically unsold, virtual propane cargo loading next month, I’ll explain the next move.