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It’s “Big, Bad Oil” again!

You might not all have heard of Centrica, but they own the most recognised natural gas retail supplier in the UK, namely British Gas. They became headline news here this week, as have other energy companies in recent months, by posting what some have described as obscene profits, tripling to over £3.3 billion for 2022, even though British Gas’s contribution has actually dropped from £110 million to just over £70 million. The reason that the huge profits have been made in Centrica’s upstream operation is of course due to the massive jump in oil and gas prices resulting from the war in Ukraine, and those prices have been passed on to British Gas, law doesn’t allow them to be discounted, and British Gas (and others) have passed them on to the customer. In the customer’s eyes it’s those big bad oil and gas companies, again!

Last year the six biggest Western oil companies, ExxonMobil, Chevron, Shell, Equinor, Total and BP posted the highest ever combined profit, a number in excess of $220 billion, and similar outrage and denunciations were pointed at them, as with Centrica this week. But while politicians have been pressurising “Big Bad Oil” to reduce fossil fuel production, for obvious reasons, spelt out pretty clearly in the Paris climate accord, last year brought something of a U-turn, as the focus was turned on cutting the West’s reliance on Russian oil and gas, but encouraging everyone else to increase their output, including the six named above. The likes of ExxonMobil had resisted reducing their capital spend on fossil fuels the most, BP maybe the least. ExxonMobil raked in over $55 billion in profits in 2022, dwarfing Centrica. But I’m not sure what we expect “Big Bad Oil” to do, we are all agreed, although with maybe differing angles, that we must see a reduction in the burning of fossil fuels, the question is how much and how quickly can we “realistically” do it. It then becomes a question of “transition”, and do we trust the oil companies as the best way to achieve it. Although they have been keen to increase their renewable status, a lot of it is relatively skin deep, as they remain companies that return the most to their shareholders by exploring, drilling and producing oil and gas. Investors reward oil companies not for ambitious plans to reduce carbon emissions, but by producing more oil and gas when prices are higher, that’s how the market forces work. But that’s also the paradox society is trying to grapple with, however much we accept the requirement for “transition”.

As always, the key is in the numbers. Shell made a profit of $40 billion in 2022, doubling the figure made in 2021, but despite all this money slushing around, they didn’t increase their capital expenditure budget and that includes renewables, they still sit at less than 15% of Shell’s investment in the future. So, if oil companies are not spending on renewables, and we would expect/ hope they would, what are they doing with all these super profits. For example, Chevron made over $35 billion in profits, and although they will spend $10 billion on renewables over the next 5 years, they’ll commit $12 billion in 2023 alone to basically oil and gas investments. But the key lies in the staggering $75 billion being committed to share buy-backs and dividends to reward the investors. In fact, the big six above paid out $110 billion via share purchases and dividends last year. U.S. shale companies are following a similar line. Some suggest this is a better investment route to “transition” than leaving it to “Big Bad Oil” themselves, as those benefitting financially can take-on the renewables mantle, but somehow, I doubt it. In the end it will require law-makers to make laws, not politicians to drift in and out of the rhetoric. In the meantime there’s going to be a load of LPG that will still need to find its market in the next 10 or 15 or longer years!

It feels as if we could easily talk about this week in LPG as one of transition. The market hullaballoo of the last few winter months appears to be receding as traders, and other players alike, contemplate the transition from winter to summer. The key as always is the degree of backwardation in the market, coupled with the fear of the cliff edge, when premiums that compensate sellers for the index price drops, fall fast and furious. Everyone hopes for gradual movements, but we’re talking about the LPG market, where nothing happens in a measured way! But if you looked at the Asian market, hearts were less jittery, even though it was Valentine’s week. A couple of full cargoes of 46,000 Mt propane got sold at pretty good numbers, with premiums in the $70’s/ Mt when equated to the March FEI index. Despite eroding PDH and petrochemical margins, a little bit of flat price deflation appears, and a few more players come to the market, especially buyers into Korea and China. This was mirrored in the Asian “window” with bids being the order of the day, even as first half April arrival is now the focus, with March drawing to a close.

But what’s all the apparent desire to buy really about, as winter starts to slip behind us, you would think a few sellers would start to appear. Apparently not; even a seller’s tender got fixed at pretty healthy numbers, not a sign of a seller concerned about finding a home. The market overhangs we tended to see in years gone by appear to have been diluted. There’s more of a balance in the market. Buyers are concerned that April arrivals will remain early April and not slip, as they see a shortage of stems in the U.S., a concern over production in the Middle East, a tighter shipping market than had been expected, Panama Canal delays slightly back on the up, while behind them a Chinese market restarting faster than had been expected by many.

In the U.S. we had another week where propane stocks dropped by just over 2.5 MM Bbls, but who really cares, it’s still more than 50% higher than last year. Well maybe sellers might care, as we did see propane prices in Mont Belvieu slip about 8% over the week, but then crude oil levels did come off too by Friday. There’s this sense in the U.S. that ships and stems have been booked out so far ahead, that even though the desire of sellers is to push more exports, the export system, including ships, is making it far more difficult than many were expecting. If you look at the shipping market you’d probably agree. Here we have a Middle East market struggling to increase exports, yet the freight levels from Ras Tanura to Chiba are at significant premiums to loadings out of the U.S., and let’s face it the returns from the U.S. are not to be sniffed at. Normally ship owners are biting their nails at this time of year, and with all those new buildings in the pipeline, you’d have expected their nails would have long gone. But no. It’s certainly transition time, but the underlying fundamentals of the market are again testing us beyond just daily price movements.

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