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Auction time!

It’s maybe a relief to talk about the economy again and not about war. Of course, the focus is once more on China, and the contrast of a world grappling with inflation, while for China their most recent CPI and PPI dropped 2% and 2.5% respectively, which in plain words is deflation! In the meantime, U.S. Treasury Secretary Janet Yellen has begun a two-day trip to meet Chinese Vice Premier He Lifeng in a bid to limit economic fallout between the two, as doubts remain on how cordial relations really are. Nobody expects any magical outcome, but at least they’re talking and that’s important as both economies are inextricably linked, and de-coupling would be disastrous for both superpowers, and for that matter the world as a whole. It also allows the two countries to ease into the President’s Biden and Xi meeting at APPEC in San Francisco next week. China will be rolling out the red carpet on U.S. soil in an attempt to erase the negativity being felt by U.S., and other international investors, seemingly about China’s various anti-business rules, the internet being the most talked about of all. Many economists believe that the issue of falling prices in China is heavily influenced by dropping food prices, especially pork, down over 30% in the last year. There are clearly issues, but maybe not as bad as people believe, and finally, after a huge lull, the Chinese government are realising it is better to be pro-business, especially when dealing with the outside world.

Of course, China’s macro-economic, as well as its eco-political manoeuvring, are one-thing, their demand for oil, and especially LPG is another. But the two are clearly linked. What is very evident is the fact that China’s oil stocks are bulging, the direct result of a weakening in crude oil demand, as the two tend to go hand in hand. Both gasoline and diesel consumption in China is edging lower, while the “teapot” refineries located in Shandong province, have seen refining margins go negative, even with a high proportion of Iranian priced imports, forcing utilisation well below two-thirds capacity. The same is happening in the U.S., despite EIA numbers being delayed a week due to computer maintenance. Throw in the reluctance of peripheral players to the Israeli-Gaza conflict getting involved, and therefore escalating the war to areas likely to impact oil and gas supplies in the region, and you can see why prices have been on a downward trend all week, only with a very small reverse on Friday. The forward view for WTI has seen a flattening of the backwardation curve and the potential of seeing contango appear again.

As for Saudi Arabia’s 1 MM Bbls/d production cuts, which they voluntarily extended last week until the end of the year, coupled with their holding of official selling prices to Asian customers, despite weaker refining margins, they’ve both cast doubts as to what direction the Kingdom really wants to take. Without doubt it clearly shows the uncertainty in the market at the moment between the impacts of movement in the supply-side and demand-side factors.

Again, this week in the LPG world was geared to the “what to do” questions, and actions, of those players controlling the VLGCs in the market having to make decisions as to their Panama Canal transits, or not, as the case may be. The first decision was pretty easy, don’t just go and sail towards the Panama Canal, unless you’re prepared to wait for a very long time, or you have a calling for the auction game. What surprised a number of ship owners was how many auction slots were actually surfacing. The first this week went for a mind boggling $4 million for a northbound slot, then easing for southbound transits to $3 million and $2 million respectively. They are incredibly high, but the fact you can get them suggests that maybe there is a degree of availability, that many felt unlikely when the additional restrictions limiting normal transits were announced. Of course, ship owners have sent there ships away on longer, but more controllable routes, as far as timing is concerned, and this has certainly eased some of the initial congestion fears.

Whatever your thoughts are, it does look as if most of the ships that were building up in the December programme out of the U.S. have all but disappeared over the horizon. VLGCs discharging in Asia are now heading back towards the Suez Canal or via the Cape of Good Hope, pushing back ETAs by at around a couple of weeks. But the U.S. to Asia freight market has already shot its bolt, jumping to around $240/ Mt, and for this week it’s pretty much stayed, but has been unable to move even higher, not for now anyway. In the meantime, traders looking to find solutions to their timing issues have targeted the few remaining Panamax VLGCs, pushing their values over $270/ Mt, as delays passing through the old locks is a lot less, and is possible. At the end of the day the cost of not going via the Panama Canal route is $100/ Mt or approximately $4.5 million, so if you have important dates to meet in Asia why not pay a few million at auction, or try to grab a Panamax size vessel, which at a premium of $30-35/ Mt ($1.5 million), is a relatively cheaper option. As for the Middle East it does start to look as if vessel values will start to equate to the U.S route to Asia, as ships are now ballasting past a deviation cut-off point to loading in the Middle East. November fixtures were one of the quietest for a while, but the market remains strong.

Of course, those with cargoes are trying to reduce the extra costs of heading to Asia by offering into Europe, but they’re facing a reluctance to buy, given the relatively mild start to the winter period and lousy petrochemical running rates. There is a feeling that any upward move in the Dutch TTF natural gas price might push North Sea producers to leave (reject) LPG in the natural gas. Today a value of around $10/ MMBtu for LPG is below the $15/ MMBtu TTF quotes, but without doubt there’s a deluge that could still come from the U.S. to meet any potential shortfall.

As for Asia, well it’s the same old story. Demand is pants, as the backbone of the recent expansion in demand, Chinese PDH plants, are just having to bite the negative margin bullet. Less prompt tenders, maintenance programmes being brought forward, cargo resales and book-outs are somewhat offsetting the potential cargo delays. It’s certainly far easier to book-out if you supplier is late delivering the cargo. Yes, traders have been forced to do the same, or cover in, but its only keeping the market going. Some stock build purchasing from the Japanese and Koreans is also helping the market remain where it is, but there is going to be a time where Asia will look back again to U.S. producers to take the brunt of any expanding ARB, forced wider by astronomical freights, and still way high export fees.

As for the U.S., well the elastic band broke on the data reporting system!

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