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A year of death, destruction and change!

It’s difficult for me not to recognise the significance of the first anniversary of Russia’s invasion of Ukraine. I try to have a balanced view of most things, but I just feel any war that results in such death and destruction is so difficult to fathom, least understand in the modern era, and especially in Europe. No doubt the highly acclaimed movie “All Quiet on the Western Front” will win more than just an Oscar or two in a couple of weeks’ time, but I’m sure you’ve watched it like me, and just gasped at the utter brutality of war. That said, this conflict, like no other in recent history, has pointedly highlighted the use of energy as a weapon, while economically impacting not just Europe but also the rest of the world. It feels as if the war might take another twist, while the oil and gas landscape appears to have changed forever. Let’s just hope someone, somewhere can expedite a truce and a final settlement, but as all traders quickly learn, never trade on the back of hope!

The oil landscape has certainly changed for traders in the last year, directly and indirectly as a result of the war in Ukraine. Indian imports of Russian crude oil are up nearly 10% in January to just under 1.5 MM Bbls/d, and together with another 1.7 MM Bbls/d going into China, you’ve probably got 75% of all Russian exports, as the pre-war figure of 5 MM Bbls/d must surely have reduced, notwithstanding that the world of sanctions plays havoc with capturing true data. Prior to that most of the Russian crude oil ended up somewhere in Europe. Of course, we’ve also seen a plethora of new trading outfits with Russian oil access credentials, and currency optionality, enter the market, filling the void created by the big players, such as Trafigura and Vitol, as well as the trading arms of the oil majors, jettisoning themselves out of Russia. No wonder Russian exports of crude oil appear to have been so resilient despite sanctions galore.

In the meantime, data for 2022 shows that Russian natural gas exports, via the various pipelines to Europe, plunged to levels never recorded in post-Soviet Russia. Now there still appears to be plenty of natural gas moving to Europe, and amazingly Nord Stream One still managed to move 25% of Russia’s pre-invasion export volumes before it was shut down indefinitely for maintenance in September last year, also the Yamal pipeline movements via Poland ended in May last year, leaving only the TurkStream pipeline (which goes from Anapa in Russia to Kiyikoyy in Turkey), and amazingly still some transits via Ukraine, as the only European export routes. After importing some 225 MM cubic metres of natural gas from Russia pre-invasion, this has dropped to less than 60 MM cubic metres. But worldwide Russian exports in total have dropped by less, nearly 50%, offset by increased sales via the Power of Siberia pipeline to China, which made up nearly 10% of the new, lower number, and a 10% increase in LNG exports, mainly from Yamal LNG plant in the Arctic.   

So, in the anniversary week, the markets appear to have readjusted to the realities of the war. Expectations of severe shortages in Europe, restricted LNG supplies, regasification problems, low storage levels, well they just didn’t materialise, in fact the opposite was the case as more volumes were imported and a mild winter put pay to the natural gas price hawks. Also, the release of strategic reserves in the U.S., global demand issues, caused by general economic malaise and more specifically due to high energy prices weaning users off twisting the heat dial up, have kept crude oil prices edging down, to what appears to be a new equilibrium in the $70s – 80s/ Bbl. By the end of this week, we had seen the first reversal of 6 consecutive trading days of crude oil price declines. Further bearish news on Wednesday of another large build in U.S. crude oil stocks was then offset by reports that Russia was now cutting western port exports of crude oil by 25% in March and April, to top the 500 M Bbls/d cut they had earlier announced. This pushed oil prices higher, together with a bullish report on Chinese demand from Morgan Stanley, but traders still fear potential actions by the “Fed” and what happens with the next inflation report.

For the LPG market it’s also been about what will be the next step, as winter demand starts to ebb away, but that’s not to say there’s nothing happening now, there certainly is. You have this interesting paradox in the trading world, where we have a tight shipping programme and tight supply from both U.S. and the Middle East. In fact, it goes a little further than that, certainly if you’re still talking of U.S. March loadings. If your vessel’s arrival date doesn’t fit an obvious available stem, which there are not many, and you calculate the waiting cost for a loading date that does fit, then you won’t be surprised to see the odd ship prepared to slightly discount its rate idea to make a deal work. The supplier is still able to push his premiums, knowing the ship needs him more than he needs the ship. But as we pass along the timeline it still becomes clear that there simply isn’t an abundance of ships to choose from. Therefore, while March re-sale terminal premiums have pushed close to 15c/g, it’s been less exciting for April sellers who are struggling to stay in double digits, as ARBs are slightly weaker and freight levels are certainly stronger.

What is it with these VLGC rates, we’re certainly a quarter through the year, some may say a third, and they keep their amazing strength despite the conveyor belt of new buildings. We keep saying reduced volumes out of the Middle East, yet the premiums enjoyed over the U.S. continue as rates surpass $100/ Mt from Ras Tanura to Chiba. Now, normally ships head west to the U.S. to seek higher rates, but the U.S. has been in the relative doldrums, and some may say that ship owners decided to veer west because they didn’t seem to be the supply of cargo from the Middle East producers. You’d expect rates in the west to therefore drop away, but as if by magic they are up some $25/ Mt on the week for the staple Houston to Chiba voyage, and that’s on the back of a number of fixtures, not just talk. Now we’re told early April is tight, mid-April is pretty tight, what next. Now some will point to an increase in Panama Canal transiting delays, but maybe we are just getting used to the fact that current production levels are still way above where they’ve been, even though somehow we feel they should be higher. With natural gas prices so low we will see more NGLs extracted in the U.S., and in Europe we will see more refineries burn cheaper natural gas, pushing LPG back into the market.

As for Asia, it’s been sliding, some may say a little sideways, as forward demand programmes are smaller. But, with propane/ naphtha spreads looking healthy for LPG there has been some buying activity into flexi-crackers in Korea and Ningbo. PDHs are still hesitant but are edging up to the plate. As usual we are seeing a gap between sellers and buyers, and not just a few dollars. This is as good a sign as we will get that winter is almost done. Let’s just hope the same can be said of the conflict in Ukraine!

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