SIMON SAYS: There’s very little tolerance in the U.S. export system, come rain or shine (or fog!)

Submitted by Simon Hill on Mon, 12/02/2019 - 17:00
There’s very little tolerance in the U.S. export system, come rain or shine (or fog!)

Although last week was shortened by the Thanksgiving holiday, a few more pieces seemed to be falling into place in the U.S., and for that matter when moving out of the U.S. as well. If we then add in a few what might or might not happen questions, it was actually an eventful last week of November. Then came the attention on the U.S. from Asia, concern may be, as well as from a small number of trading houses nestling in the major cities of Europe. But why the concern?

Well, the unease is probably over three “situations” in the news, not necessarily their immediate impact but the worry of what might follow. Asia’s buyers are clearly worried, and this anxiety has been driving numbers higher in Asia, as there is a determined underlying effort to keep the ARB open. The situations are the Port Neches fire and its impact on LPG loadings from the Nederland terminal, the continued delays passing through the Panama Canal, originally resulting from fog delays, and fog again, but this time in the Houston Ship Channel. Yes the fog is back!

The incidents are a wake-up call for importers in Asia, who might be thinking it’s just a matter of switching supply on and off, but the driving forces are a little more subtle, as we know the U.S. will continue to maximise exports, if the capacity is there. More on that later, what about Port Neches? Wednesday saw a series of explosions at TPC’s Texas chemical plant 90 miles to the east of Houston, causing a massive fire that took 48 hours to get under control, and resulted in the evacuation of not only the small town of Port Neches, but also Groves and Nederland. The plant produces 20 percent of U.S. butadiene, and the area was evacuated due to concerns over the health consequences associated with the petrochemical gas. It also resulted in the closure of the Sabine Neches Waterway on Wednesday for about 12 hours, due to poor visibility as a result of the heavy smoke, as well as the uncertainty surrounding the possible knock-on consequences of the fire. Ships could move through a safety zone with U.S. coast guard approval, with it appears very little impact on LPG loadings from the Nederland terminal. But it sent a shock wave over the Pacific and Atlantic, that with the concentration of so much hardware in one area, any incident may well impact LPG facilities, directly or indirectly, and could well curtail exports of LPG from a terminal or terminals in and around Houston.

Then the dreaded word “fog” came on the radar again by the end of the week, reminding players what happened last March when the fog in the Houston Ship Channel severely delayed LPG and other commodity shipments, with vessels waiting to berth and leave the two main export docks of Enterprise and Targa, backing up ships into anchorage positions in the U.S. Gulf. Seb Willems of Glencore referred to it in his victory speech at the recent LPG excellence awards in London, as the main factor that significantly impacted the market last year. The worry is it might well do it again, as the period from now until March next year is particularly susceptible to fog, as warmer, humid Gulf air collides with cooler onshore air. There were over 450 hours in 2019 when all or part of the Houston Ship Channel was closed, compared to just under 550 hours in 2018, and 350 hours in 2017, so it can be significant, especially when it is concentrated in one time period, as happened last year.

We have also seen the impact over the last couple of weeks of fog causing delays for ships transiting the Panama Canal, especially the knock-on effect of a build-up of ships waiting to transit. Again, if everything is running smoothly the delays are minimal, but it shows that one event can suddenly change this, and it always tends to be on the delay side, never bringing transits forward. This has a number of implications, as it can immediately delay ships arriving for loading, causing potential cascading problems at the export terminals, and with the ultimate arrival timings in Asia. It might also nudge ship owners to redirect their vessels via the Cape of Good Hope, circumventing Panama Canal transit costs, but again adding voyage time and potential delays for ships hitting the Asian market at the peak of the consumption period.

So, buyers in Asia have subliminally gone along with the CP increase, and have also edged up the FEI values to ensure that the ARB remains open. With a lot of cargoes pre-booked in advance for loading in December, there are fears that additional volumes might not be easily available, especially if the ARB was to narrow. But it’s always a fine balance, as the U.S. exporters have been operating at pretty much full pelt, given the constant need to maintain exports, that currently underlies the U.S. market, even when a bout of cold weather and crop drying triggers an upturn in demand.

I’m also having to be patient with regards capacity improvements, as we do see higher production levels suggesting that Enterprise’s new fractionator is being slowly brought up to speed. Likewise, we are also seeing higher propane exports, and a few more ships loading at Enterprise, but nothing to suggest the 5-10 VLGC uplift in exports originally announced is happening. P66 from Freeport have certainly edged their VLGC exports up to around 11 ships per month, from an average of around 9 ships about six months ago, but there isn’t much more flexibility in the overall export system, maybe the odd mid-size loading here and there. And with butane off the spot menu, it’s hard to take full advantage of the butane capacity upgrades, especially out of the Targa terminal.

Within the U.S. market, the talk is now about forecasts of mild weather starting to creep in and pushing into the eastern two-thirds of the country over the next 10-15 days. Production concerns at the well head are still there, but crude oil prices have been resilient since October, and this certainly helps producers, as does the relative recovery of natural gas from fears of sub $2/ MMBTU to hovering above $2.5/ MMBTU during the same period. Therefore, we might not see the recent big EIA inventory draws in the coming weeks, and this is going to ease the relative strength of U.S. propane prices, reducing concerns of the ARB narrowing. But whether this means more cargoes, I have my doubts, but it probably implies more money for the re-seller as terminal fee premiums are likely to hit double digits again soon. If terminal capacity had been increased in line with the announcements then we would be seeing more export cargoes, meaning that freight levels would be jumping even higher, but they are under pressure, mainly because of the weakness in the east bringing more open ships into the equation. There are only a few re-lets according to market players, and if we are going to see some form of reaction to the countdown towards IMO 2020, then I wouldn’t expect to see sub $120/ Mt for the Houston to Chiba voyage last long. However, with the paper ARB in December floating just below $200/ Mt, leaving $80/ Mt to cover terminal fees, this should easily squeeze every last ton out of the U.S. export system, many would argue it already has.

In this week’s Trade Secret, we are going to build a few more positions for the winter, as we are fast jumping on the same bandwagon, that something is going to give, that the tap might not keep flowing. The weather watch is going to be less focused on the cold fronts, more there interaction with warm air and the resultant forecasts of fog!