Yesterday I explored the implications for LPG as a result of last week’s drone attack on the Abqaiq crude processing facility in Saudi Arabia, that the damage is probably far greater than has been explained so far, and that Saudi Arabia’s current focus is on security, crude oil and the impending IPO of Aramco. The reduction in LPG exports so far have been limited to what appears to be four cancellations, delays in loading dates until after 12th October, and requests to shift cargoes back from October to November, in an attempt to find logistical solutions. But one thing is for sure, there’s a lot less LPG in Saudi Arabia.
By my calculations, monthly exports from the Middle East were hovering around 3.2 - 3.4 million Mt per month at the start of the year, but with both the drone attack and the tightening of the grip on Iranian LPG exports, I’m expecting monthly exports in the fourth quarter to drop down to nearer 2.6 - 2.7 million Mt, a fall of around 650,000 Mt. Some of that drop has already been made-up from extra supplies from Australia, but this is less than 100,000 Mt per month, and from U.S. export growth, although the recent drop in propane exports is suggesting this is not the case, even allowing for an increase in split cargo loadings out of Houston. But demand is not sitting tight, especially given the new and fully operating PDH plants in China, the re-emergence of Indian imports and strong petrochemical feedstock economics over the full year.
Therefore, what you take away with the one hand, you can give back with the other, is clearly what ought to be applied to the position the international LPG market finds itself in. With this scenario in mind, the “giver” is surely the U.S., particularly given the EIA stock figures released this week showing propane inventories have already broken through the 100 million Bbls mark for the U.S as a whole, with probably four to five weeks of the injection season still left. The jump of nearly 3 million Bbls has kept the propane to WTI crude ratio relatively static, while FEI values have strengthened, opening up the ARB to around $170/ Mt for pretty much the balance of this year. The combination of reduced supply options from non-U.S. sources, and winter just being around the corner, should bring the buyers to the table a little quicker than was the case a month or so ago, especially as the traders have had a reasonable year so far, stemming from the strength of the LPG shipping market, and they should want to build up profits in the run-up to the end of the year. A wider Asian ARB, and more buying interest on paper, must surely close the gap in supply left from the Middle East’s recent problems, even allowing for the effect of the China / U.S. trade dislocation.
Oh yes, I forgot, the third element is of course the exporters stepping in with extra cargoes to sell. It was only a few months ago that Enterprise announced to the market that they were planning to increase LPG export capacity, out of their Houston facility, to accommodate up to 10 cargoes per month, and 5 slots would be made available as early as in September this year (i.e. now!), with extra spaces starting to filter through during the fourth quarter.
I’m thinking these extra slots should easily solve the international shortage, not perfectly I know, and we have to talk freight as well, but clearly the “giver” is not just the U.S., but more specifically Enterprise. Okay time for a cup of tea, may be pop my feet up to watch New Zealand versus South Africa in the Rugby World Cup in Japan, Tottenham away at Leicester in the Premier League, my old stomping ground of Singapore hosting the F1 qualifying, and read an article about Gardner Minshew II ( I always thought II was Junior?), the Jacksonville Jaguars rookie quarter quarterback, who supports a moustache Tom Sellick would have been proud of!
What do you mean there haven’t been any additional slots made available yet, not even after the drone attack and the ARB jumping $25 per Mt (nearly 5 cents/gallon)? But Enterprise announced it. Apparently it’s not ready yet or something like that. I’ve heard rumours that it is delayed until the first quarter next year, but I’ve also heard that it’s going to be fourth quarter, and an extra new slot will appear every decade of the 3 months. I’ve also heard that priority has been given to using the dock space for crude oil exports in priority to LPG exports. So, it looks like I better continue writing and forget the cup of tea. At least the All Blacks have beaten the Springboks, whether that is good news for England’s chances, I’m not sure either.
But let’s not jump to conclusions too quickly, I did hear maybe one extra cargo had been sold ex Enterprise in the third decade of October, maybe this is the start. The jump in the ARB has certainly brought a few deals, but the word ”few” says it all. A 6 cents / gallon terminal fee market has now pushed through 8 - 9 cents/ gallon for propane cargoes, and maybe it is up to nearly 10 cents/ gallon if there is butane available. There looks as if there’s been a small slug of butane also sold out of Targa, but not the volumes of extra LPG required to make up the Middle East shortfall, and to be honest not what we were expecting.
Certainly, the weather hasn’t helped, and with brine storages in the Houston area having filled up with water from the heavy rains dropped by tropical storm Imelda last week, it’s difficult to fully appreciate what the consequences might be. This might only be limited in its impact, but with other potential storms building up off the coast of Africa, and strong currents and swell along the Gulf coast, it makes sense to keep watch on future storms, their severity and their impact points.
I think we all felt that the U.S. would step up to the plate, and that exports would not only fill any potential void left by Iranian sanctions in the fourth quarter, but also cover the potential cutbacks out of Saudi Arabia. Again, we are facing what appears to be a midstream problem, with a lack of fractionation capacity made worse by the apparent delay in increased export capacity. Propane exports are also down but this has to some extent been offset by increased butane loadings, as split cargoes going east are more palatable for traders than the risk associated with full propane cargoes. But it’s clearly not enough.
In the virtual trading room, we are happy to keep our ARB position, as either the strengthening of terminal fees and/or freight levels will start to test the $175/ Mt level. Maybe there is room for a spread a bit further down the curve. Happy cargo hunting!