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It’s tough at the top!

I had written last week’s Simon Says before the scale of the attack by Hamas militants became known. The human cost has already been far too great, far too horrific, and I fear what this weekend may have in store. I did briefly revisit the history books and what happened during, and after, the first World War, the defeat of the Ottoman Empire, the “promises” made, mainly by us the British, to Arab leaders and the Jewish immigrants, some openly in the Balfour Declaration, while secretly re-drawing and splitting-up gains with the French. It was a mess then, it’s a colossal mess now!

I explained previously how there’s been initiatives to re-balance the Middle East, re-align Israel with other moderate states, especially Saudi Arabia and the UAE, with the support of the U.S., to ultimately redress the equilibrium in the region, especially with regards Iran. And to also bring Iran closer, with prisoner swaps, releasing billions of sequestrated funds and easing back on sanctions. But that looks as if it’s potentially all gone up in flames, not just because of the Hamas attack, and the Israeli response, but also the implications of Iran’s involvement, and the need for solidarity in the Arab world. For President Biden he has had no choice but to hold Israel close, whether from true personal conviction or political necessity. He appears to have given Israel the freedom to act, and we all know how this could play-out, but then there’s the big question of what happens afterwards and is any future Middle Eastern accord going to be merely a pipedream.

President Biden has been recently looking the other way when it came to record Iranian crude oil exports, both to appease opposition to initiatives with ostensibly Israel and Saudi Arabia, and in the hope to keep oil prices lower. In the short term the crude oil market has not panicked, and if Iranian sanctions are to remain for longer, well it’s no real change on what’s gone before. But they can be tightened, as we have seen with President Obama prior to the JCPOA signing in 2015, followed by the Trump administration’s withdrawal from JCPOA culminating in the taking away of consumer country exemptions, squeezing Iranian output below 2 MM Bbls/d in 2020. Today, production is up at more than 3 MM Bbls/d, of which two-thirds is exported. What lies ahead is anyone’s guess. One thing is for certain, don’t expect any progress on sanctions being eased, it looks as if the opposite will apply.

In the meantime, back in the U.S., the agreed takeover of Pioneer Natural Resources by its shale rival ExxonMobil was somewhat sidelined by the horror headlines coming out of the Middle East, but it’s still significant in many ways, not least the belief that consolidation will start to temper any significant growth in the U.S. shale patch. The jury’s out for me on that.  Anyway, in an all-share deal valued at just shy of $60 billion, out the other side will come the largest producer in the largest U.S. oil field, the Permian. The newly enlarged ExxonMobil also plans to increase its production to 2 MM Bbls/d, an increase post-merger of 700M Bbls/d. Pioneer is currently the Permian Basin’s largest well operator, accounting for nearly 10% of gross production, while ExxonMobil is ranked in 5th place with around 6%. Is ExxonMobil back, well a price of $120 per share looks better than the $30 investors had to suffer in 2020!

So, in such a dramatic week the oil price jumped, feared the worst as it tends to do, then the reality of a big build in U.S. crude inventory by 10.2 MM Bbls, associated with the negative impact of a substantial increase in gasoline stocks, and the concerns as to the health of the economy that brings, brought us back pretty much to where we had started the week. Then news came of the imminent invasion of Gaza and tighter sanctions on Russian crude oil exports, as two shipowners were fined for carrying crude oil with a value above the $60/ Bbl cap. Short sellers covered in quickly and hey presto Brent went above $90/ Bbl. Turbulent times!

Meanwhile back at the ranch, or Texas at least, many have seen something of an LPG conundrum in the last week or so, and it can pretty much be put down to the impact of timing on the markets. Firstly, news comes out of a force majeure situation at the Enterprise terminal, nearly a couple of weeks ago, with compressor/ cooling problems pushing loading dates back a few days. In the meantime, propane exports have shot above 2 MM Bbls/d, pretty much for the first time. So, it’s always good to wait for the impact, but the following week news emerges that both Phillips66 in Freeport and Energy Transfer in Nederland are having similar issues, culminating in expected delays. It doesn’t take much to work out that surely this will significantly reduce the volume of exports during that week and the next. Then the EIA propane export numbers come out this week at a record 2.129 MM Bbls/d. In the meantime, with all these exports you’d expect the shipping market to be roaring, I accept it has in previous periods, but in the week that record exports are reported the freight rates drop, and perception is that they will drop further. Now of course this is all about timing. The window for fixing ships out of the U.S. is pretty much second half November, not in the week that ended 6th October when the export numbers were calculated. Okay that explains the “timing” but what’s really happening?

For me the underlying issue is LPG demand in Asia, especially, but not limited to, China. PDH margins are negative, and this sector has been built-up by commentators, including myself, as the market redeemer. Capacity has shot through the ceiling, but delays bringing new facilities on-stream, maintenance schedules elongating, and plants operating at minimum running rates has meant cargo demand is at best slow and under expectation. Throw in the wait for colder winter temperatures, if they will happen, and Asia is at best flat lining. The hope that the end of Golden Week would bring greater buying activity didn’t materialise, in fact two PDH buyers turned round to become sellers.

Therefore, we saw cash differentials slip when you’d expect them to start to gain a degree of upward momentum. The “window” saw premiums of around $5/ Mt above November FEI slip to barely above flat, while large 46,000 Mt propane cargoes were sold into China at discounts in the mid-teens. All this bearish feel simply forces down the Asia end of the ARB, while the U.S. looks flat, bolstered by stronger WTI and very small builds in weekly EIA propane inventories. So, an ARB enjoying $300+/ Mt is now squeezed to closer to $275/ Mt. In the meantime, traders are finding it tough to buy cargoes out of the U.S., with premiums for terminal fees being offered in the low teens, while buyers are struggling to offer much above high single digits. But as ships start to appear more and more on the broker’s lists, ten maybe in second half November, and a few still earlier than that, we are now seeing ship operators being forced to buy their own cargoes to cover. The market might be reporting $210/ Mt U.S. to Asia freight levels, but the reality may well be sub $200/ Mt. It’s tough at the top!

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