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Propane v Butane!

It feels as if it’s been a really long week, waiting and wondering. The oil markets have been doing the same, as they try to apply a risk premium to how this crisis between Israel and Hamas might end up, especially if it intensifies into a more regional calamity. You can see from the visits of western world leaders that they fear escalation in a geopolitical sense, which is on top of the more pressing concerns of a “measured” response from Israel, finding the hostages and getting much needed humanitarian aid into Gaza. Sadly, there appears to be an inevitability to everything. The question though is how bad could it get?

As I’ve said recently in “Simon Says” economic downturns are triggered by sharp jumps in oil prices, so with the crisis being in the Middle East, any escalation impacting oil supply and therefore prices are going to be felt throughout the global economies. Currently the potential catastrophe is localised, but if fighting starts to move to the northern border between Israel and Lebanon, involving the Iranian-backed Hezbollah, this could start to drag Iran closer into the crisis. Rockets have certainly been fired, villages evacuated but it’s a wait and see time, nothing is for certain. Any “dragging-in” of Iran will certainly involve an escalation to the aggression, and that increases the risk of disrupting oil supplies passing through the Straits of Hormuz. Hezbollah will fight a proxy war funded and supplied by Iran with money and weapons, but for Iran directly, it will be about disturbing the flow of crude oil and LNG on the other side of the Arabian Peninsula, and that’s what could spark oil prices to jump dramatically into the “hundred+”/ Bbl.

It’s certainly been a stronger week for oil prices, with WTI moving up from the mid $80s/ Bbl to near enough $90/ Bbl, although at the same time closing the gap a little on a less perky Brent market. Certainly, news of Iran calling for an oil embargo on Israel helped to muster buying concerns, even though the volumes are small in global terms, it was the message that spooked the market. There were also reports of missiles being fired from Yemen being downed by a U.S. war ship in the Red Sea, understood to be heading towards Israel, but as we know incident reports can be re-configured by all sides. In the U.S. there was also a decline of some 4.5 MM Bbls in inventory which helped prices stay high. In the meantime, the Dutch TTF natural gas price continues to move up, not only as Henry Hub passes $3/ MMBtu, but also because of the impact of closing LNG production, off the Israeli coast, on Egypt’s LNG export business.  The only real piece of bearish news this week has been the easing of sanctions by the U.S. on Venezuela after the country’s government and opposition agreed to have next year’s election monitored by international observers. But there’s still a lot of water that will need to pass under that bridge before we see more oil exported. And now news of two hostages being released and humanitarian aid finally crossing into Gaza from Egypt, both appear gestures but at least they take some fire out of the situation, and that’s what the oil markets will need to see in the coming weeks.   

In times gone by you would have expected any Middle Eastern aggression, especially if it involved Israel, to freak not just the oil markets, but also LPG. Yes, the uncertainty is there, but the fear of supply issues is far milder than we have seen in the past. If anything, the markets are subdued, and as there’s a massive debate emerging on the rights and wrongs of the current crisis, there’s another one going on with LPG, as players try to explain the movements in the pure propane market versus demand for split propane and butane cargoes. Normally at this time of year the propane markets start to gain momentum, replenishing stock for the winter and also starting to see the early buds of winter usage emerging. In the U.S. they talk of the end to the build season as relatively stagnant production numbers are overtaken by an upsurge in winter propane usage, but then the last ten years has seen exports somewhat change the normality of this event. In the northern hemisphere winter demand is predominantly propane. But this time round there’s an eery feeling. A lot of this traditional propane demand has been capped if not reduced, as a result of a generally warmer climate, and the competition from natural gas/ LNG in many parts of Asia. But there was also hope, that the greater propane export volumes emanating from increased U.S. shale NGL production would be gobbled-up by the burgeoning capacity of PDH plants, especially in China. But this year more capacity has not meant more propane buying, instead more capacity, coupled with a sluggish Chinese economy, has meant negative margins, lower running rates and more maintenance shutdowns, or delays bringing new capacity on-line. And this is certainly coming to the fore this week, as spot tenders were few and far between, buyers tried to defer deliveries, and Chinese players sold to each other, always a worrying sign.

But on the split cargo side there was new demand, sparked by India and Indonesia evident in the market. Although we are only seeing marginal interruptions in Middle East supplies, the previously announced OPEC+ production cutbacks are certainly taking their toll. Then in the U.S., the issues with three of the four main export terminals pointed more to butane in two of the force majeure cases. In the Middle East split cargoes still enjoy a $15-20/ Mt premium over propane cargoes, and the CP market for November already has butane $15/ Mt higher on paper. Clearly, it’s a split cargo time of year!

Propane’s relative weakness has also played on the ARB as prices in Asia have struggled to mirror the jump in crude oil, with the Mont Belvieu market slipping from above 35% of WTI to now struggling to keep above 33%. But that’s deceptive. The ARB is not widening in an attempt to suck more imports in to Asia, it’s more a move to accommodate high U.S. propane inventories and limited export capacity brought on by the three cases of force majeure. The lack of FOB cargoes out of the U.S. export terminals and even from re-sellers has pushed terminal fee premiums up into the lower teens, but the market isn’t really there. It’s hard to get cargoes, but there’s not the appetite to risk taking these shipments to Asia either, despite netback margins touching $100/ Mt to cover such premiums and Panama Canal delays.

The VLGC freight market certainly let off some steam this week, but after a few of the cheaper options went, the remaining tonnage lay in the hands of those willing to wait and hold firm on rates. There are, it appears, more ships than cargoes generally around the world, but as winter weather starts to take hold, voyage times will rise, let alone the choices increasingly being made by ship owners to ballast back to the U.S. the longer route via Suez. And then there’s Panama Canal delays to boot.

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