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Come on, is it the start of winter yet?

As the flurry of negotiations appear to have stalled, for now anyway, the reality of what comes next in the Israeli/ Hamas crisis appears to be upon us, as Israeli special forces start to cross borders, remaining on the other side, and on the offensive. How this will roll out in the “strip”, in the region and beyond, is for the moment held on ice, but what might be simmering is starting to emerge, and it’s going to be hard for any of us not to see, and potentially feel, the impact, emotionally, politically and certainly economically. As to the future, let’s hope sense will rule, as restricting escalation is certainly the order of the day, whether in the Middle East, Ukraine or maybe Taiwan soon. As for the future of the oil and gas industry, well it will always be a party to geopolitical rumblings and eruptions at any given time, but it must firstly square-up to the realities of the global climate and fossil fuel demand issues. This week was no different, another important projection, another sigh from all those getting increasingly worried. Even for me, I’ve seen my hometown of Chesterfield, here in the UK, flooded for the first time in my rather long life.

So, it was time this week for the IEA to talk about the future, a group set-up to advise industrial countries on what they see in their computerised crystal ball. Of course, it’s also good to contrast it with what the OPEC reporting group are saying about the same thing. Somewhere in the middle might be the point of overlap. For the first time the peak of oil, gas and coal demand is seen as materialising by the end of this decade. The politicians might want it, half promise it, but the data guys are now edging towards some sort of parity with their ultimate political mandarins, even though they’re probably not going to be on the same page. The IEA’s head Fatih Birol is keen to emphasise the transition to clean energy, stressing that it has passed the point of no return. The growth of electric cars, the apparent slowdown of the Chinese economy over the next 5 years, coupled with China’s positive move to cleaner energy, are all driving it, forgive the pun! But let’s not get too carried away. Okay coal demand takes a pretty dramatic fall as the new decade begins, but demand for oil and gas remains pretty much constant for the next twenty years, again way-off the required levels required to meet the Paris Agreement, aimed at restricting average global temperature increases to 1.5 degrees Celsius. The key is now how politicians and investors react, and I mean investors prepared to put their money into new oil and gas projects still required to meet expected demand.

As for the oil markets themselves this week, it’s been a bit of a dip but very much topsy and turvy in getting there. A week that started with WTI around $88/ Bbl, ended the week close to the midpoint between $85 and $86/ Bbl. The markets have been, until the Middle East crisis, pre-occupied by the juggling of market supply issues and broader economic concerns, now a third ball has been thrown in, that of geopolitical risk in probably the most important region for the industry, the Middle East. Of course, the more panicky end of the ball juggling is influenced by “breaking news” events, and the U.S. strike on targets in Syria raises the level a little, and this was reflected in a small move up in prices on Friday. The big questions remain, what does Iran do in response and what happens next. Until we know, the market is trying to ease away, it just doesn’t have the shorter-term demand momentum to stop it. As for natural gas, European storages are practically full, but prices are edging up, above $15/ MMBtu for the Dutch TTF marker, and now close to $3.50/ MMBtu in Henry Hub in the U.S.

As for the LPG world, it’s also stumbling to get going. The bearish signs still linger in Asia as PDH margins remain on the minus side in China, while the encouraging news of reduced Chinese LPG inventories is more the result of cargo delays than increased winter off-take. Higher than normal stock levels in Japan and Korea are a sign that increased heating demand is still a little way off yet. But a couple of more seasonal propane full cargoes did get fixed for December arrival. One with a high single digit discount to December FEI into Japan, and another for delivery at a freight induced premium of around $5/ Mt into Ningbo on the east coast of China. But the more speculative risk-takers in the market appear to be very gently flexing, as a window that was showing December FEI flat was seeing premiums off-window closer to $5/ Mt. This was also being mirrored in the paper market as spreads widened at the front, with November/ December gaining over $2/ Mt on the week, December/ January and January/ February increasing over $4/ Mt. Greater backwardation is normally a sign of speculators heading more to the bull side. But let’s not exaggerate here, the market in Asia is still generally sluggish.

Move away from Asia and the picture appears a little differently in the rest of the world. In the Middle East we are still waiting for the November CP, which is likely to move up a little, but for split cargoes there remains a $25/ Mt premium over CP. Although players see FOB cargoes still around in November, the premiums remain. In the U.S. we are seeing the repercussions of delays at three of the four main export terminals in the last few weeks. It’s meant a relatively weak European market suddenly unable to pick and choose cargoes to buy, as arrival delays kick-in at a time when North Sea loadings have also been delayed by the weather. Having said that, the propane/ naphtha spreads have narrowed making LPG less attractive as a feedstock, even with low cracking rates, but the weather channels are bringing a little hope for winter demand to get going. Winterish weather in the U.S. is also slowly taking some shape in the northern part of the country.

But, it’s hard to say from the above that the ARB has been influenced by a weaker U.S. or a stronger Asia, it appears to have had the usual freight wedge driven through it, this time coupled with a foray into the bid side of the terminal fee market, as VLGC freight levels rebounded, again, back above $200/ Mt, while terminal fees in c/g stretched to the very high teens, the highest for some while. That makes up around $300/ Mt of the ARB, with a perceived net-back margin of $30-40/ Mt being absorbed in greater delay risk, especially via the Panama Canal. Single digit day delays are now becoming double digit again, while VLGC owners are being forced to up the ante on transit auctions, back over $2 million, with some saying we could hit closer to $3m in November, some $60/ Mt extra to be found somewhere in the rate or the trader margin. Ships are therefore taking the Suez Canal/ Cape routes to ballast back to the spritelier U.S. freight market, but that in itself is increasing ton miles, again pushing ships back rather than bringing them forward, hence higher rates.

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