There’s been a lot of commotion recently about the role traders might be playing in influencing the crude oil markets, emanating mainly from the Chairman of OPEC himself, Prince Abdulaziz bin Salman. Some say that those sudden and unexpected production cuts in April by OPEC+ were aimed squarely at the hedge funds, and others, who had been taking short positions in the market, evidently causing a downward domino effect across the oil indices. Dare I say it, the term “thrown under the bus” comes to mind. If you recall, there was a wave of the “heebie-jeebies” in the financial markets, caused by the collapse of a couple of U.S. banks, and the feeling that there were more serious economic issues lying ahead. Hedge funds decided it was time to short crude oil and prices started to fall. In the meantime, various voices of OPEC+ tried to tone down concerns, re-assuring market players that this was not a drop in real demand and would not require output cuts. And then they suddenly changed their minds, pushing crude oil prices up by more than $5/ Bbl, something of a counter surge.
If you’ve got a really good memory, you’ll have recollected already that back in 2020 the Saudi Oil Minister had said he was “going to make sure whoever gambles on this market will be ouching like hell”. Well, this time a load of hedge fund managers felt a pain rarely experienced before, covering in shorts at pace. I know what you’re now saying, what does this have to do with the week that’s just passed. Well, nothing really, it’s more to do with the world of LPG itself. If you read into what Prince Abdulaziz inferred, then maybe it explains what’s been happening recently in the LPG world, where an armada of gas ships got fixed, around 15 in May alone, by the fairly recently established Aramco Trading Company (ATC). But I carefully inserted the “maybe” word. For sure it’s a change of tack from Saudi Aramco, but heading into the logistical world, normally the sacred turf of the big trading houses, is a dramatic move. Yes, there’s been a clear edict from above to get more involved in the market, and not just be an FOB seller, and they have the resources to see it through. We’re seeing the same with ADNOC trading, as Abu Dhabi tries hard to develop its own identity in the Middle East as a stand-alone pricing centre, and with the relatively recent appointment of Jo Moffat to head-up the LPG trading group, there’s bound to be a few new trading strategies we’ve not previously seen.
But before you say it’s a predetermined strategy at play to enforce the demise of the traders lifting out of the Middle East, think again. In my view this is all about protecting CP, and if you remember Prince Abdulaziz has done that before, and it was then about sending cargoes to disappear in the vast underground salt domes of Mont Belvieu, in order to protect sales, and you guessed it, CP pricing. It was way back in the 1980s, but I think we’re seeing it again now in the 2020s. As Saudi Aramco have been able to post LPG prices that are ostensibly above market, buyers from outside India have seemingly given up on signing term CP contracts. So, what to do? Well, if you want to sell to China or elsewhere you’ve got to get on the FEI bandwagon, and that nets-back consistently cheaper than CP. No longer do Saudi Aramco have contract holders that are willing to take the implied losses, they simply don’t have contracts anymore. Therefore, what better way of protecting CP, shielding sales into India, where CP is a given, than to disguise FOB prices by loading up cargo on board of chartered-in ships and sailing them into the night, well to China mainly. We all know the netback is going to be well below CP, but nobody is seen paying a minus number FOB, they’re just getting cargo on a delivered basis. Again, it’s all about the relevance of CP in today’s market, now that’s another story!
So, a little more about crude oil pricing this week, again falling after hovering for a while in early week trading. Of course, it’s those words “the economy” that’s bearing down on everyone, coupled with an inventory build, I’m certain you also saw it was the same size build as the EIA announced for propane stocks on Wednesday, a little over 3 MM Bbls. Interest rates were supposed to have gone through their upward cycle, but there’s now talk of more rises to come and for inflation to hover higher, and for longer. Even news of more buying from the U.S. authorities to fill the Strategic Petroleum Reserve didn’t bolster the market too much. To complete a pretty negative picture, natural gas prices, at the wonderfully named Waha Hub in West Texas, dropped into negative territory per MMBtu, as the lower demand due to mild weather and maintenance of offtake pipelines took their toll.
Now back to ATC, and the reality in May has been the fixing of about 15 VLGCs to lift LPG from Saudi terminals. It’s your call whether they are returning more money to the Aramco coffers when you netback to Ras Tanura or Yanbu, but they’ve certainly bolstered freight levels back up to the mid $90s/ Mt for the Ras Tanura/ Chiba route, that less than two weeks ago was heading to $70/ Mt. The activity has also boosted Houston to Chiba rates, that are up $10/ Mt in the same period to just shy of $140/ Mt. Of course, it also sends a signal to the market that here’s an abundance of cargoes heading to Asia, it’s hard for ATC to cover up loadings in a system they haven’t yet developed. As for CP, well a fellow Middle East producer was left scrambling for a sale in the high $20s discount on June CP, for a lifting in the first ten days of June.
Asia itself ended a week in which things happened but there were certainly no fireworks. The window saw very few bids or offers, no actual deals, and it was left to reports of a couple of second half June off-market trades at small premiums above June FEI to grab any attention. Full cargo 46,000 Mt cargoes seemed to grab a little more premium if not the attention of the market players. Again, it’s the PDH and flexi-cracker buyers who are dipping in.
The ARB did manage to scrape a few more dollars to widen to $175/ Mt, mainly on the back of the weakness in crude oil impacting U.S. sellers more than Asian buyers, especially as we were back in “over-build” mode after the announcement of the 3 MM Bbl jump in the weekly EIA propane stocks. Of course, the freight element consumed most of the ARB, leaving re-sale numbers hovering around 5 c/g. But with ships in short supply, and cargo apparently not, what else would we really expect. In the meantime just keep an eye on the newish Middle East producer-owned trading companies, they might be trying to camouflage their own netback economics, but will it stop concerns about CP pricing, something that has been going on for pretty much 50 years now!