Untitled design (41)

Economic doldrums, not the LPG market!

It’s difficult to stress how important the perception of the global economy is to the machinations of what makes the oil and gas markets move from day to day, hour to hour, minute by minute. So, I think the news that the world’s largest economy, the U.S. of course, has sharply fallen off the pace is worth serious consideration this week. The growth figures for the first quarter of 2023 saw the U.S. economy expand by a mere 1.1% on an annualised basis, down from the 2.6% seen for the final quarter of 2022, and well below the 2% expected by those economic experts with their fingers on the so-called pulse. The worry is not just the number, it’s the fact that arch GDP rival China recently published a growth rate of 4.5% for the same period. Even the Eurozone is being touted at rates closer to 1.5%, as individual countries, who have reported numbers so far, are above forecast, not below.  But is it all bad news?

You could say that the Fed’s crusade against rampant inflation is being won, as the runaway train has clearly slowed down. A year of shifting interest rates from practically zero up to 5% is doing the job, and there’s may be another quarter point still to come. But the economy may yet enter recession at some point, and that’s playing havoc in the minds of oil market players, trying to assess the balance between supply and demand components. It’s no use China expanding when its main customers are doing the opposite. It’s therefore a global headache, again. As for the U.S. itself, easing an individual but important problem is not the one-policy that covers all panacea, the housing market still has to endure significant pressures as affordability remains near an all-time low, business investment activity is also starting to soften, inventory management/ supply chain concerns remain, consumer spending (the backbone of the U.S. economy) is cooling-off as wages are still lagging prices, further exacerbated by credit curbs, and the previously buoyant jobs market is also waning as sentiment shifts to caution. And then there’s Treasury Secretary Janet Yellen calling on the U.S. Congress to raise, or suspend, the debt ceiling to avoid what she described as a potential “economic catastrophe”. As for other western economies, the success in tackling inflation is not showing through in the numbers, as shown to be the case here in the UK.

So, there you have it, economic news to dampen anyone’s spirits, even though some would say it’s the first step in getting the global economy pointing in the right direction. As for the crude oil market, it certainly had an impact, with prices pointing pretty much down all week, even with a slight flick-up by Friday. After keeping its head close to the $79/ Bbl mark at the start of the week, WTI has slipped away to barely more than the mid $70s/ Bbl by Friday, with Brent following a similar trajectory. Even a largish crude inventory draw of 5.1 million Bbls, did little to spark the market up. Therefore, traders tried to see what could be squeezed out of comments from Russia’s deputy PM Alex Novak that despite Chinese demand for oil underscoring expectation, there would be no further need for production cuts in the foreseeable future, and the minor spat between the IEA and OPEC, as the IEA warned OPEC that they should be careful not to cut production too much simply to bolster prices at a time where the global economy is more fragile. OPEC blamed the politicians and the traders for the state of the world economy, post COVID-19, monetary policy, algorithm trading, commodity trading advisors, so on and so on. Their dig at the U.S. was of course the reference to crude oil being released from the Strategic Reserve. So not much out there to get that bullish feel all traders pretty much want. But nobody seems to have told the LPG players!

You would have thought with all these holidays either being taken, or creeping up on us, that the market would start to show signs of early summer doldrums, but far from it. It’s as if buyers flipped the page in their forward buying diaries and found the open June sheet a catalyst for entering the market. Okay, CP will be out by the time you read this and normally that brings a few players in if they feel we might get a larger increase in CP than expected, but that’s not really going to be the case for May. The bullish undertone in the market is more likely to have been sparked by potential cargo delays caused by more than two weeks sat waiting to transit either north and south bound vias the Panama Canal, and the continued gap between Asia’s naphtha numbers and LPG import levels. After a week of term tenders into Taiwan, China and Korea were covered, the spot buyers seemed to be at every turn. I won’t use the word frenzy; well, I just have. They were trying to buy into Malaysia, Ningbo, those Chinese PDHs that I always spell incorrectly, and a new cracker on the bloc, this time in Hainan Island, once described to me by our Chinese broker as the “Hawaii of China”. It’s all relative! The window was less active this week but the last second half May position got booked, and although a single digit premium was paid, that’s far stronger than we were expecting coming into June.

With the sturdier feeling in Asia the ARB managed to regain some width, ending the week not that far off the mid $170s/ Mt after starting it closer to $160/ Mt, but netbacks from Asia and especially Europe to the U.S. were barely holding, as pressure again came on cancellation levels. But without appearing to be a broken record there must be more exports out of the U.S., not less. Even those controlling ships seemed to get the message by the end of the week. Initially they saw a wider ARB as a good opportunity to push freight levels up $10/ Mt from $125/ Mt at the start of the week. Yes, the ARB felt as if it could sustain it, but charterers felt less optimistic. They know finding homes is always difficult at this time of the year, and buyers in Asia are there, but are also looking for discounts, so how long are premiums really going to last? And then there’s of course the Panama Canal, suddenly news passed down those delays of 15/16 days on Monday had dwindled to only a couple of days by the end of the week. Asian buyers became less anxious about arrival timings, and shipowners began to see the reality of the market, easing their freight offers back closer to the $130/ Mt mark. Re-sale values appear to have held above, rather than below, 5c/g for full propane lots, but watch out for more butane flowing from the U.S., as normal butane prices fell this week twice as fast as propane, with split cargo re-sales getting done closer to the 4.5 c/g level. A week is a long time in the world of LPG!

Share this post