Everybody’s eyes are now firmly set on what’s stirring-up in the U.S., and it’s not just Adele’s appearance on Saturday Night Live, we’ve also only got to wait just over a week to find out who won, Trump or Biden! It’s not that long ago, I believe it was February this year, when the polls were showing President Trump had just about maneuvered himself ahead, but only eight months later it’s a totally different story. Will the same reversal of destiny also apply for LPG export numbers out of the U.S.?
It’s so far been a story of spectacular growth for the shale revolution’s overspill, namely LPG exports. At the end of last year over 30 million Mt of propane and nearly 8 million Mt of butane had been exported by ship out of the U.S., amazingly that’s close to the 40 million Mt mark, and nearly 20% higher than in 2018. The rate of export growth was supposed to decline anyway, but COVID-19 threw nearly all predictions to the lions, as the price of WTI crude oil collapsed, and the weekly rig count again and again went into negative territory, with the likelihood of exports actually falling becoming more of a reality. At the start of the year most forecasters had been predicting $50/ Bbl crude oil numbers, and at that level we were expecting to see an export increase of something in the order of 3.5 to 4 million Mt in 2020. But crude oil prices have hardly moved above $40/ Bbl, whether we take them as an average, or just plot them over the last couple of months, which meant that the early season prognosticators started saying any potential export increase during 2020 could be lost, and be left with annual numbers hovering around the same levels as we had seen in 2019. Not good news for us internationally minded lot, however plenty can happen in just six months!
In the U.S., Mark Twain had apparently popularized the saying “lies, damn lies and statistics” in the early 1900s, and we all know predicting the future, especially in numbers, can be thwarted with potential errors and miscalculations, and this definitely appears to be the case if you compare the EIA’s weekly propane exports with its monthly LPG numbers, albeit there is a time lag of a couple of months to get the data onto a seemingly more accurate footing. But even if you allow for a little rustiness in calculating the conversion of barrels of propane and butane on a daily basis into annual LPG volumes, it still produces interesting reading about what might actually be happening.
Of course the EIA’s export numbers need a little more fine tuning, essentially to strip out land exports to Mexico, and small but forever increasing propylene volumes, in order to roughly compare like with like, but it’s the trend that is most important. First quarter data was in all practicality released before the impact of coronavirus, and weekly propane exports were above comparable 2019 numbers by nearly 200 M Bbls/d, but by the second quarter the numbers had certainly reversed, with the weekly propane export figures coming out over 100 M Bbls/d below the 2019 levels. Maybe the forecasters were going to be right?
Certainly if you looked at the shipping market at the time, you would believe the downturn in exports was for real, with freight levels for VLGCs on the Houston to Chiba run dropping below $50/ Mt, after a winter gyrating in the $100s/ Mt. But as the market moves forward, and concentrates today on the upcoming Winter of 2020/21, the EIA keep churning out more numbers, monthly this time, and they throw in butane for good measure. For the start of 2020, the monthly propane quantities were going hand in hand with the weekly numbers, however by June, we started seeing the monthly numbers coming out 150 M Bbls/d above the weeklies. For some reason, the EIA’s shorter term measure was under-reporting propane exports, and the market rumours of record exports over the summer will probably continue the trend. Again, if the VLGC market is anything to go by, July rates were back up in the $90s/ Mt, signifying more exports, amongst other things.
So, while most players were caught-up thinking of the negative implications of COVID-19 on LPG exports, the bite has hardly lived up to the bark. Forecasters are now saying that 2020 will see exports grow, may be not the circa 20% we saw in 2019, but it could reach as high as 10%. Now these numbers are way above production forecasts, at best around a 4% increase, and that is probably starting to tell us something about what might be happening.
I’ve said many times before, that unlike in the Middle East, the U.S. exports are less influenced by production numbers, especially in the short-term. Exporters are there to satisfy their contractual commitments, and also fill as many slots as they have available. If the likes of Enterprise, Targa, Energy Transfer and P66 are happy with the level of terminal fees being paid in the market, then they only need to buy more propane and butane in Mont Belvieu at whatever the price it is trading. In simple terms it’s taking it away from storage or other domestic buyers. Exporters are not just selling excess production; it doesn’t work that way! In addition we now have spare fractionation capacity and excess Y-grade in storage, so what’s happening in the field may not be mirrored in Mont Belvieu, keeping production higher. Also the shale producers have used wells drilled but uncompleted (DUCs) to enhance short-term production, at a time when overall new drilling has pretty much evaporated, and they are producing from NGL sweet spots, especially in the natgas producing regions, in search of higher cash returns. So, there’s no surprise LPG exports are somehow performing higher than forecast, even beating previous records. October may see nearly 75 VLGCs loading, that’s huge, nearly 25% of the overall fleet in one month. The big question will be how long this can continue?
We certainly need to keep an eye on the demand pull from Asia as we approach Winter in the northern hemisphere. The market in the last week has eased after the excitement of the previous few weeks, the determining factors are still there, especially the stronger economic performance being shown by China and a few other smaller nations, as they appear to be recovering from coronavirus. But as markets suddenly move from contango into backwardation, buyers with a less urgent need for prompt tons, tend to play the spread by selling current shipments at higher prices, with the intention to buy them back in a month or so at lower numbers. The Japanese and Koreans have tried to do this, and market premiums have been dropping off, with the last done appearing to be closer to FEI flat. Not even the usual run on the Saudi CP has managed to bolster FEI. When coupled with the apparent start of the U.S. stock drawdown season, a cold front in the mid-west of the U.S., and potentially higher Mont Belvieu prices, it would be easy to say that we might see exports tread water for a while, especially as delays are keeping the VLGC numbers high and starting to squeeze re-sale terminal fee levels. But a lot can happen in politics in a week, sorry I should have said LPG!