It’s been a week of Presidents flying around the world in search of answers and photographers, Joe Biden in his ancestral home of Ireland, as well as President Macron to Beijing, but as the international diplomacy starts to hot up, we mustn’t take our eye off the ball, and that ball is the U.S. economy. How many times have we heard that it’s China heading for the top of the economic tree, as the U.S. enters a decline it simply can’t reverse, with an economy that many believe is “broken”. Ex President Trump wanted to make “America great again”, and President Biden has spent a couple of trillion trying to alleviate the relative decline of the U.S. “super-juggernaut”. But if you read the “Economist” there’s a different slant, as the U.S. remains the world’s “richest, most productive and most innovative” of the larger economies. Today the U.S. accounts for nearly 60% of the G7’s GDP, up from 40% in 1990. Employment is higher, educational achievement is higher, R&D, patents, inventions are more, capital access is better, fertility is higher, the list goes on, but so does the need to adapt to China, a country that will take whatever steps in order to gain more economic and geopolitical strength. And then there’s climate change too.
As natural gas prices around the world have slipped from their peaks of last year, there’s an increased murmuring that Asia is starting to react positively to lower prices, especially LNG. With levels having dipped from record highs in August 2022 to the lowest in some two years, the likes of India, Thailand, Pakistan and others have been more active buyers in the first quarter, and of course Chinese demand has also edged up. As the winter declines so will these numbers, but early signs are of quantities holding. Asian prices are roughly around $12.5/ MMBtu, way below the heady heights of $70.50/ MMBtu in August last year. China imported over 5.5 million Mt of LNG in March compared to only 4.75 million Mt a year ago.
The key is the fight to buy, especially when compared to last year where Europe paid big, and won big, over Asia! But this year looks different again. A warmer winter, coupled with less competition from Asian LNG buyers in the last year, has meant that Europe leaves winter with higher than anticipated stock levels, at more than half full. But Europe cannot afford to enter next winter with a relaxed view on supply, a sudden cold spell and renewed interference from President Putin may well throw a spanner in the works. But there’s more storage capacity, import terminals and re-gasification facilities to give Europe a degree of calm. Then add-in the fact that U.S. export capacity is on the up anyway, and all should be well for a steady flow of LNG to Europe while still allowing Asia to feed its own demand requirements. That said there’s still around three quarters of U.S. LNG exports heading for somewhere in Europe. We also shouldn’t ignore Latin American demand, as their southern hemisphere winter is about to begin, but as I see it there’s enough to go around!
Back to the U.S. again, where natural gas inventories are well above, that over-used word, “average”, and with-it prices are reported to be at their lowest level in real terms for three decades. I certainly can’t remember them being so low. 1,900 billion cubic feet of natural gas sits in storage, the highest for three years, and nearly 20% above the 10-year averages for this time of the year. With production up nearly 4% last year compared to 2021, and weather-related demand down, exports are key, just as they are for LPG. And without doubt they are there, with LNG exports nearly 9% up in 2022 compared to 2021, and a lot of the increase came prior to the explosion at Freeport in June 2022, with the remainder of the year pretty much flat. But with Freeport back-on, and new projects gathering speed to completion, we should see a considerable jump in export volumes, helping the Henry Hub prices and satisfying the demand requirements of Europe, Asia and Latin America.
The LPG market certainly had a spring in its step as it returned from the extended Easter break, maybe it was more catch-up than any significant market trend, but at least it had some life in it. The surprise was more in Asia where demand appears to be holding up during the transition from Winter to Summer, but to be honest this changeover has been somewhat diluted by the expansion of PDH and petrochemical buyers in recent years, although it’s still a potential hurdle. Tenders were above normal, as marginally better PDH margins brought a few more Chinese buyers back into the market looking for propane volumes. We also saw FPCC in Taiwan pick up cargo, as discounts above $100/ Mt to FEI/ MOPJ clearly brought a little buying joy. In fact, the relative cheapness of LPG is certainly attractive for the flexi-crackers in Asia. But the market needs to be aware of an increasing global interest in running ethane, both now and in the future, and as more VLECs enter the freight arena the global reality of cheap U.S. ethane will hit home. With the collapse of natural gas prices, ethane was trading sub 20 c/g in Mont Belvieu at the close yesterday.
In Europe the petrochemical crackers are pushing as much LPG (and ethane) through the system as they can get their hands on, and there’s a load of U.S. imports arriving in late April/ early May, well over half a million Mt. Local supplies from the North Sea are also expected to rise as the trend of leaving LPG in the natural gas/ LNG exports has all but disappeared with the massive price reversal of recent weeks. Dutch TTF prices are holding around the $13/ MMBtu levels, and it seems a long time since they were back up around $100/ MMBtu. But the market in Europe was steady, maybe even showing signs of a tightness in finding cargo when you want it.
The ARB has had a relatively quiet week finding its feet above $150/ Mt for both May and June loadings. It was certainly helped to spread a little wider by the announcement of a build in U.S. inventory, and this will probably continue to be an increasing weekly EIA event as we approach the second half of April. How time flies! Exports will have to react, and there’s certainly been a few more buyers popping their heads out of the sand when re-sale numbers were rumoured to be dropping below 5 c/g, but as the ARB moved wider, re-sellers upped their offers to around the 6 c/g mark, killing-off a lot of the interest. And then the ship-owners got wind of it, and freight levels moved up again in the week, by more than $10/ Mt by Friday. But then ships have been fixed and as such disappear quickly from broker’s lists, as the first two decades of May appear to be sold-out. Then add in renewed delays transiting the Panama Canal, not too far off double figures both ways, vessels in the hands of the ship owners, and you can see why rates are now back up in the $130s/ Mt. Despite cutback news, the reality is that there’s still a lot of LPG that needs to get shifted over the coming months.