Untitled design (81)

Edge of your seats stuff!

It seems strange that as the U.S. retaliates for the killing of three of their servicemen in Jordan, the crude oil market has seen the biggest weekly price drop since November last year. It seems that reports of negotiations of a possible ceasefire between Israel and Hamas in Gaza are moving in the right direction. Brent started the week above $84/ Bbl but has closed nearer to $77/ Bbl, more than a 5% drop. But with fighting still continuing in Gaza late Friday night, and Israel announcing it was moving into Rafah, it’s hard to share the same optimism, and now there’s U.S. retaliation. Other market players suggest the Fed’s decision not to ease interest rates, or even suggest there’s relief on the way, coupled with the woes of Evergrande in China exacerbating the economic concerns over China, are more the trigger these days.

Certainly, it’s been a week for the speculators and the rumour mill, somewhat overshadowing the fundamentals, such as OPEC+ deciding to roll-over its production policy and unexpected refinery hiccups in the U.S. impacting short-tern crude oil demand. This week’s OPEC+ oil ministers meeting was certainly more of the same again, and there were even hints that the group would rollover the 2.2 MM Bbls/d cuts into the second quarter during their next get together in March. In the U.S., BP’s Whiting refinery in Indiana suffered a transformer failure causing a loss of power throughout the refinery complex. At 435,000 Bbls/d it one of the biggest refineries outside the U.S. Gulf region.

Traditionally LPG traders tend to sit back or anxiously perch on the edge of their seats in February. They’re trying to work out whether we’re so far down the winter timeline that markets, bulged by expectation of cold weather, are over cooked and likely to fall dramatically, or that winter is likely to be written as “done” for the year, and there might just be a cold spell around the corner to look out for. It’s usually the hardest decision to make during any year. Of course, the market is far less impacted by seasonality as it was, but at the margin it can still make a big impact. Most players have looked as far as they can in their weather crystal balls, and they see no potential of below average temperatures for long enough periods in Asia in the next couple of months. There’s been cold weather, especially in Northern China, but it only lasted a short period, some may suggest it was barely below average for this time of the year, and there’s high enough stocks to cope anyway. On the other hand, traders know that once the flexi-crackers in Asia get a taste for LPG they buy to consume, not to store. So, if suddenly there is a sustained cold patch it’s harder to react, especially when you add in every ship owner and operator are drastically trying to delay ships in the hope of a better market.

As we quickly approach Chinese New Year, we are seeing the market in Asia dominated by feedstock buying for both the flexi-crackers and to a lesser extent PDH plants. Whether in Korea, East China, North China, Taiwan, everybody was reaching out for cargoes, however they weren’t prepared to reach too far. An abundance of apparent demand meant the traders started to up their offers, pushing to double digit premiums above FEI, albeit still low compared to a relatively overpriced CP. As always seems to be the case, having interest, even tenders to buy, doesn’t always translate into real deals, and buyers quickly dropped out of cargo contention. We did see some shipments fixed, including one into Northern China at March FEI plus a low single digit, but at least it was a plus. Pertamina also entered the market, bolstering the split cargo values, already up on flexi cracker interest in butane. As for the window in Asia, well it was a little quiet, mainly as players were still trying to work out the physical fundamentals, assessing whether we were really at a turn in the market. A first half March propane cargo of 23,000 Mt did get booked at a couple of dollars premium over FEI, but there was a feel that the second half of the month was heading into negative territory, again with players knowing winter doesn’t last forever.

In Europe there was some degree of bullishness in the market, buoyed by the recent cold weather, which has long gone by the way, and hefty import volumes for January coming in at just under 500,000 Mt. The TOT market suddenly came to life with offers in double digits and the odd deals getting done at a high single figure premium. This is as exciting as it can get in Europe these days, but a propane/ naphtha spread of around $120/ Mt still makes trades possible, even from the U.S. export market.

The U.S. market continues to escape the recent shackles, with Mont Belvieu prices jumping to over 95 cents/ gallon and the ratio of propane to WTI hitting 55%, way above the 40% levels we were seeing only a few months ago. The issues lay firmly in Mont Belvieu as we are now seeing a 10 c/g spread between Conway in Kansas and the major U.S. Gulf storage area, suggesting that it’s not winter demand pushing prices, but a shortage of inventory and working supply. Certainly, the cold weather has impacted production of NGLs from the gas plants, although we did see a production increase of 187 M Bbls/d to just under 2.5 MM Bbls/d, yes, an increase but still below where we were. At the same time stock levels have dropped by more than expectation, with a fall of 5.3 MM Bbls week to week. Bigger draws certainly make sellers happy, but there’s no need for panic as over 62 MM Bbls still sit in the salt domes of Texas and beyond.

What has just ebbed away is the ARB between the U.S. and Asia, even with some renewed optimism in Asia, but the price there has continued to fail in keeping up with price increase in Mont Belvieu. The ARB for March loadings is just about hanging in there at around $115/ Mt, but export re-sellers are already pushing for double digit premiums, even as high as 13 c/g for March (over $65/ Mt). A simple calculation and you can see there isn’t the same room for freight, so with rates now amazingly down at $70/ Mt, there isn’t much room for deal making. In the meantime, ship owners are looking to ballast VLGCs around the Cape at eco speeds, but it will only make February arrivals end-up in March. There are too many ships chasing too few cargoes at the moment, and until the ARB starts to move the other way, this trend is likely to continue.

Share this post