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Not tango, contango!

I don’t know what’s more worrying, President’s Putin and Xi figuratively sticking one or two fingers up to the West, especially given what’s happening in Ukraine today, and what could happen tomorrow in Taiwan, or once again leaving the financial system to the central bankers, battling still untamed global inflation by yet again raising interest rates, while the banking system itself looks extremely perilous to say the least, where their so-called “value”, in the form of securities, appears to diminish every time the Federal Reserve, ECB or now the Bank of England ups interest rates. Clearly banks are not yet repaired, despite the promises, and therefore any optimism on the global demand front has to be guarded to say the least. It’s all playing hard on the crude oil and natural gas markets, to which LPG has to march in-line with.

One thing though that did catch my eye this week was the report published by the Federal Energy Regulatory Commission, FERC for short, on 2022 happenings in the U.S. natural gas market. They saw much higher levels of domestic U.S. natural gas consumption, just at the time of higher demand for U.S. LNG exports, yet today Henry Hub prices are on a significant decline, with the EIA struggling to keep pace with their pricing forecasts, seemingly dropping them every publication, with $3.02/ MMBtu the latest stab. Without doubt the mild winter has had a grater say than pure economic struggles when the price nearly tipped $10/ MMBtu. Today they sit just above the $2/ MMBtu mark. As is the case for propane stocks, natural gas inventories are now more than 25% higher than the 5-year rolling average, albeit the percentage increase is far higher for propane. LNG exports in 2022 jumped nearly 10%, but a huge swing from the normal receivers in Asia (especially China) to homes in Europe doesn’t look as if it will continue into 2023, and with more export capacity coming there’s still a fear for prices, despite players predicting increased demand from the electricity generating sector in the U.S. around the corner, flat rates of production growth in the U.S., and of course more exports.

We might be slipping out of winter and the summer season in the northern hemisphere is fast approaching, but there’s also news that La Nina has officially faded away after impacting global weather for over three years, and this is potentially making way for El Nino to re-emerge. The question is when? Pacific Ocean waters along the Equator are the warmest for three years, and the boffins are back talking about their oscillations, frantically modelling in order to try and put a timing on when we might see El Nino again. The bets are on July/ August, with a 65% chance of El Nino influencing weather patterns, versus a 35% chance of no influence. It’s normally good news for farmers, and more heat may well increase natural gas demand on the back of air conditioners being cranked up. Let’s see if we mention it again this year.

In the meantime crude oil markets recovered from the multi-year lows experienced on Monday, edging back up to just below $70/ Bbl by Wednesday after hovering around $66.75/ Bbl most of Monday afternoon, but they lost ground again following the announcement of increased crude oil inventories reaching two-year highs, no buying for the Strategic Reserve, and of course the banking’s inflationary concerns. By Friday after some gyrations, it was back just below $70/ Bbl. On a brighter note the US$ weakened, encouraging buyers and Goldman Sachs came out predicting $100/ Bbl, feeling that $97/ Bbl was an easier target in just a year’s time. I wonder how many times they’ll need to update that forecast?

As for LPG, it’s that time of year when the paper market starts to lose the winter fizz and the reality of summer starts to take centre stage. I always like to keep an eye on second quarter cash differentials, which have fallen from just under $20/ Mt premium for the April/ May spread, back on 1st March, to just a couple of dollars in the positive at the close on Friday. In very simple terms when the deemed spot market is protruding buyers rather than sellers, the number remains positive, but as winter demand recedes so do these premiums until they reach the switching point to negative, where sellers are deemed to be out numbering buyers. And this is what we are seeing, nearly at the front of the curve, but certainly from June onwards where the market has gone negative and into contango in Asia, with weaker front months lasting nearly until the end of the year, pushing beyond the norm. So, the paper has pretty much decided that for the next 8 months the market is going to be relatively over-supplied. Nothing new, it just feels as if it could be longer than many players have been used to.  

But this week did throw up something of an apparent riddle in the Singapore window, where a bid for a first half April propane delivery in the low teens above the April FEI index was met with zero offers, and I don’t mean the premium! But nudge half a month forward into the second part of the month and there’s a lower offer, but no bid. Strange in itself, but as the season changes, half months become important. Even though by looking at the curve you feel buying now is cheaper than buying in the future, you’re also trying to milk the last remnants of winter demand, so you want to buy as early in the month, but sellers have normally reduced their end winter exposure, in fear of any sudden drop in premiums, are consciously or sub-consciously moving down the curve in search of some solace in a contango market. One piece of good news is that the spreads between propane and naphtha, in Europe and Asia, are much higher than the norm. But whether that transposes into physical buying is yet to be put to the true test, although FPCC were evident on the tender trail for a cargo into Taiwan.

The ARB has lost probably $25/ Mt in the last two weeks. It’s again a time of the year where Asia is starting to pull back, relatively speaking, and because of the time-lag in getting cargoes over to Asia, especially from the U.S., coupled with the buffer of huge Mont Belvieu storage, sellers back in the U.S. tend to be one-step later. But reality was hitting last week with the build in EIA propane inventories, and sellers were coming to terms with the need to push exports. Certainly this week’s report bolstered export demand further, to over 1.8 MM Bbls/d, but it also took some pressure off as stocks drew by nearly 2.3 MM Bbls, far more than was expected, but again the weekly numbers are prone to mis-fire when comparing one week to the next. The resale premiums are certainly under pressure and with weak netbacks it’s no surprise to see the odd cent lost as numbers retreat closer to the 5 c/g mark. As for the ship owners the wave may well be settling but nobody can really moan about $140/ Mt levels from Houston to Chiba. Clearly the spurt in new VLGC arrivals is being offset by more supply, more delays and more maritime rules and regulations!

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