SIMON SAYS: U.S. production cuts, less exports, Forget it!

Submitted by Simon Hill on Sun, 02/07/2021 - 17:00
U.S. production cuts, less exports, Forget it!

It felt that with every step forward we were able to make last year, there were two firmly moving us the other way, but now I’m starting to feel a little more confident we’re actually making some progress. Of course the vaccination programme is our beacon of hope, while face masks, social distancing and hand-washing, mixed-in with degrees of lockdown, have been mere obstructions to the virus. Now there’s the concern about the ever-increasing number of variants, as well as disparities between rich and poor nations, and their ability to purchase the vaccine, and then roll it out to their populations. But how does this all translate into the workings of the global economy in 2021, whose performance is the very back-bone of the oil and gas sectors, which together create the path LPG normally zigzags along.

Forget about a cold winter in Northern Asia, forget about ARBs that were $200+/ Mt one day and $100/ Mt the next, ignore the plight, or fortune, of the ship owner in 2020, put it all behind you, the new dawn has begun. For me it starts unsurprisingly with the price of crude oil, edging its way through the fifties at this very moment in time, and of course that “old chestnut”, OPEC, now the plus variety.

They’ve just all met, virtually I assume, with ministers being shown forecasts of yet more reigning-in of demand numbers for 2021. They appear to feel, like me, that the vaccination programmes may well propel certain countries economically forward quicker than others, but from a global perspective, a full-on demand recovery will be delayed, and certainly beyond the second quarter of this year. I believe they’re calling it the “inverted square root”, first used by George Soros after the 2009 financial crisis, and now back in style.

OPEC feels we will see global oil demand hit 97.7 MM Bbls/ day by December 2021, but it’s still some 2 MM Bbls/d short of pre-pandemic levels. What shocks me even more is that OPEC believes that whatever the level of demand, supply will not be able to meet it, in fact they expect an oil supply deficit throughout 2021, hitting as high as 2 MM Bbls/d in May. Whether this is due to operational constraints, or OPEC’s control of production, is yet to be determined, but for the LPG world it paints both a worrying demand picture, likely to be mirrored for LPG in consuming countries around the world, as well as limitations on supply growth, which of course has to include LPG. Clearly OPEC want higher prices, while holding back production. We’ve heard that somewhere before, but with demand so fragile, OPEC+ members seem to understand the benefits, but also recognizing the dangers, chiefly the “quota busters”.

The signs in the LPG market over the last couple of weeks have been alarming to say the least, and it appears we are close to a new equilibrium, but for how long? Asian buying is starting to return, albeit in dribs and drabs, but enough to bolster prices and cash differentials. Another high CP of course helped. In the meantime the fear of dwindling U.S. propane stocks, driven by record U.S. LPG exports, has been pacified, for the time being anyway, and with a less than expected draw in Wednesday’s EIA propane inventory report, and a bunch of cancellations on the way throughout February, what was all the fuss about? As WTI marches on up, propane slips back down. But that’s just week 5, what about the other 47 left?

I see a resolute OPEC at the moment, with Saudi Arabia again taking the lead. The message has clearly been sent out, that by keeping control of production now, oil prices will continue to move up, and as demand edges up later in the year, OPEC supply is unlikely to automatically cover the gap. This is not good news for Middle East LPG exports, already languishing at under 2.25 million Mt for the first month of 2021. I’m sure there’ll be more coming out over the year, but there’s a lot of catching up to do to reach the 37 million Mt believed to have been exported last year. A number of established forecasters were even suggesting nearly 39 million Mt for 2021. I think they may well be inflicting some damage to their pencils today!

But whereas OPEC’s overall production will be below , albeit tracking oil demand, producers in the Middle East are not going to tinker with the system, just because new PDH plants in China have flicked the switch on. In the meantime growth in the more traditional cooking markets, especially India and Indonesia, will see a slower expansion in import demand, but it will still be up on last year. So if OPEC are not going to be able to fully react to the rise in oil prices, who will?

You guessed it, producers in the U.S., albeit cautiously and from a low base, are increasing exploration expenditure. Drilling rigs are still down by nearly 400 compared to this time last year, but in the last five months they’re up nearly 75%. Yes there will be a time lag between exploration and production, but I’ve already ripped up all those reports suggesting U.S. LPG/ NGL production was going to fall-off in 2021. Last week’s EIA production numbers were back up above 2.4 MM Bbls/d, for the first time since they fell below that number this time last year. Just holding these numbers will be way up on 2020, and guess what, by the time we get to the summer there’s likely to be a lot of propane inventory building up. Also, yesterday’s fear of too many LPG exports will ultimately become a phobia of too few exports tomorrow, pushing Mont Belvieu prices down to levels that will keep the ARB open. Whereas it looked a couple of months ago as if Asia’s growth, post phase one of the pandemic, was going to be better than the rest of the world, potentially sucking out U.S. exports, it now looks as if supply will keep the window open anyway, pushing more product into Asia at a stage when they might just not be ready for it.

It’s all a matter of time, it always is, until we again see too many cargoes being pushed into the Asian market, and it won’t take too many to tip the balance. All we have been seeing recently is a skewed market, where the export rush of the last few months ended-up hitting delays in transit, especially through the Panama Canal, resulting in a swarm of shipments arriving in late February/ early March, when the peak in demand has passed. Then we’ll get a supply gap to figure out, caused by February cancellations, before normal service is resumed, and spring starts to slip into summer. There will be some holes in the road along the way but expect the ARB to remain open, and for it to widen on the back of a renewed impetus in freight levels.

Yes, probably more joy for the ship owners, who are already pushing more dry docks to the front of the year, and don’t forget there’s 70+ in total to be done in 2021. Their current tactics appear to prefer longer ballasts to the U.S. from Asia, veering off course towards the Middle East, just in case they can find cargoes, before ballasting up past the Cape, as west Africa, Algeria, Marcus Hook, and even Europe become visible, if not unlikely, loading destinations, before they push the U.S. Gulf loading button. The same old tug-of-war will ensue between product that needs to be moved, and ship owners in need of finding bounty, nothing much changes!