I’ve alluded recently to Saudi Arabia’s seemingly growing shift away from the U.S., and into the out-reaching hands of China, not forgetting the patching-up of problems with local neighbours as diverse as Iran and Israel. But I’ve also said don’t count out the U.S., and President Biden has certainly upped the ante this week with U.S. National Security Advisor Jake Sullivan calling Saudi Arabia’s Crown Prince Mohammed bin Salman to talk primarily about Iran and the Yemen conflict. There was clearly a meeting of minds according to Sullivan, and a welcoming of Saudi Arabia’s efforts to end the war in Yemen, while Sullivan also reiterated President Biden’s solid pledge to ensure Iran does not become a state with nuclear capability, let alone actual weapons. Without doubt any peace in Yemen will cast a better light on Iran’s future mobility within the international community, but the U.S. wants to make sure it doesn’t weaken any future nuclear controls. Then we saw the U.S. National Security’s regional rep Brett McGurk in Jeddah last week meeting the Saudi Foreign Minister Prince Faisal bin Farham, talking “joint co-ordination”. President Biden has clearly woken up to what’s going on in the Middle East, and without doubt the U.S. might not need Middle Eastern oil as much as it did, but it needs to make sure who does.
In the meantime, the markets still have the Russian oil price cap in place, well in theory anyway. The price Russia receives for its oil might well be below those earned by other producers, but can we really say that it’s due to the cap, of course not, it’s due to Russia reducing its prices to attract those buyers who are able to buy Russian crude but need a little price persuasion. Both India and China have been snapping up nearly all the Russian Urals oil cargoes, 70% ending up in India and more than 20% to China. But as freight levels have eased on the back of less ice restrictions in the Baltic ports, and the market price for Urals crude has seen smaller discounts in the international market, Russian netback prices are above the cap. Add in the fact that India and China didn’t sign-up to the G7 price cap in the first place, and it makes something of a mockery of the system, even though the likes of Poland are still trying to put pressure on the G7 coalition to adjust the cap.
As far as the oil markets were concerned this week, we’ve seen prices ease downwards for the first time this month. Most thought the recent OPEC+ price resurgence would continue, especially as the EIA reported an inventory draw of 4.6 MM Bbls compared to a modest increase the week before. Only the day before the API forecast a drop of just over 2.5 MM Bbls and the price went up, this time reality was a larger draw, but prices eased back. There was even bullish news out of China with first quarter growth numbers coming out at 4.5%, a level higher than most commentators had predicted, while Chinese refinery demand for imported crude oil hit record levels in March. But as always comments from a Fed official, Raphael Bostic, won the day, or should I say the week. And that comment was only implying one more rate hike was needed to get inflationary back on target. Others feel the word recession is still a possibility as the labour markets slowed in the U.S., and the “Beige Book” indicated that banks are tightening their lending while consumer spending was seen as flat at best. Clearly, we’re not out of the mess yet!
Well, the apparent rush last week in Asia for LPG cargoes appears to have come and pretty much gone, for the time-being anyway. No deals were reported in the Asian window, and the focus is already pretty much in first half June, forget May. Chinese buying, especially for the PDHs, went a little quiet, there were seeds of interest, but the buyers are starting to think discount, while sellers are trying to put this looming reality off. In fact, there appeared to be more sellers’ tenders, including an Australian origin cargo, than buyers. Most attention for traders was intra in nature, looking at covering one trader’s short or another, but in the background was still a concern over transiting times through the Panama Canal, and how they will impact arrival cargoes, together with the potential cargo reductions from Saudi Aramco and other suppliers impacted by the OPEC+ production cuts. Saudi acceptances were released and basically told us very little, neither cuts or increases, earlier or later dates. But the market was applying downward pressure to FOB levels with discounts hitting the high $20s/ Mt for full propane cargoes, while split loadings were even cheaper in the mid $30s/ Mt below May Saudi CP levels.
Of course, the ARB was a constant in most traders’ minds, and through most of Wednesday “constant” was the word, as the ARB sat around $153 – $154/Mt for May loadings, unable seemingly to move. At least by Friday it had gained some momentum and pushed through the $160/ Mt barrier. But underlying it was still a strong freight market, as owners were enjoying daily rates above $50,000 for modern eco VLGCs. This was translating into a market stubbornly holding above $125/ Mt, leaving little room for trader margins as delays were building up in the Panama Canal, 14 days north and 13 days south were the latest reports. But the market needs a wider ARB, it’s no use waiting for new VLGCs to be delivered in order to bring rates down to levels that will facilitate a constant flow of exports out of the U.S., or for that matter waiting to see any cargo reductions out of the Middle East to bite. Resale terminal fee premiums are already struggling at 5 c/g, and with more butane available post summer’s RVP change reducing the amount of butane being squeezed into motor gasoline, exporters are therefore willing to take numbers in the 4 c/g to encourage butane liftings, although normal butane is still at a $10/ Mt premium in Mont Belvieu.
The week was dogged by shipping and cargo deals failing subjects, as obvious margin disappeared, making deals harder and harder to execute. The weekly EIA stock report did show a draw of over 700 M Bbls but we’re still way above levels of recent years and more excesses are to come. Product Supplied, aka demand, is reaching those seasonal levels of circa 800 M Bbls/d with little upward momentum likely over the summer, while Production is gaining pace, pushing above 2.5 MM Bbls/d where it might well stay over the next few months. The saviour was the Export number hitting more than 1.85 MM Bbls/d, and it must remain so if inventory levels are not going to balloon. U.S. petrochemicals are still basking in ethane joy as levels remain around 20 c/g, so European and Asian petrochemical demand must remain the focus, and although margins to naphtha continue in LPGs favour, they must persist.