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Sanctions, jets or another brick in the wall?

It’s been a difficult week for me, tuned into the BBC news service, and having to look at what’s going on, both to the north and south of the Black Sea, tragically in Turkey and Syria to the south following the horrendous earthquake, and Ukraine to the north. As I watched President Zelensky arrive in the UK, I was both proud and a little concerned to hear the suggestion that we were about to provide the fighter jets that Ukraine’s President is so persuasively demanding. With the exception of the odd Pink Floyd member, we all would like to see Ukraine win, but we don’t want to see a proliferation of the war to a possible pushing of the nuclear button. But, as the Ukraine conflict appears to be entering a new, and possibly more destructive phase, we still seem to be missing the point when it comes to Europe’s position on its own energy relationship with Russia.

The key stumbling block still remains how we are handling Russia’s oil revenues. Okay, the West has put in place one of the largest bundles of energy sanctions ever imposed, banning arms-length seaborne cargo purchases, limiting ship owners from providing their tonnage for the trade, limits on financial houses and the insurers of cargoes – unless of course the oil is sold below the $60/ Bbl price cap! If you read the market commentary there is a lot of opinion saying the price cap and the sanctions have been a hit, and more of them arrived this week for petroleum products. What I question though is whether even Europe have been that successful in limiting Russian crude oil exports to its own continent let alone the rest of the world. If anything, seaborne exports have increased to the highest levels in over six months, averaging closer to 4 MM Bbls/d, and I admit the price cap was not put in place to halt the trade altogether, but to allow a steady decline in cargo flows in order to keep the crude oil bulls at bay, but the cap is not the marker, profits above that level are still being stashed in Russian banks.

There are also those who point to the price differential of nearly 40% between the Brent and Urals crude oil price, but there are still a lot of questions as to how accurate these discounts are. Let’s face it neither India nor China openly provide data as to what they’ve actually bought, and those in the know are suggesting that the discounts are over-inflated anyway, as further savings in tax can also be enjoyed. Sanctions are therefore a questionable solution, creativity and reality normally work against them in the long run. Maybe we should be sending fighter planes a little earlier than we probably want to.

In the meantime, the oil markets continue to gyrate, reacting to the next piece of news hitting the ticker tape. The market rebounded 5% earlier in the week on the back of the continued optimism with regards Chinese demand re-entering the market, but bearish U.S. employment data, and all the worries of inflation and recession that tends to go with it, coupled with an increase in U.S. inventory released on Thursday, has taken the shine off the market, well until Friday anyway, and Russia suddenly announcing a 500 MM Bbls/ d drop in March production. In fact, the Federal Reserve is back warning of yet further tightening of monetary policy. But with Saudi Aramco increasing their crude prices to Asia, together with supply issues in Norway and sadly Turkey, prices are still going to be up on last week. As for natural gas, it’s weak both in Europe and the U.S., with the Dutch TTF price struggling to hold much above $15/ MMBtu, while Henry Hub is sub $2.50/ MMBtu, hello springtime!

Although the fears over how the natural gas market might impact LPG have pretty much been laid to rest, we still can’t ignore the crude oil market when looking for direction. By announcing a 500 MM Bbls/d output cut from Russia in March, we’re starting to raise questions again as to how this will impact OPEC production (without Russia)? Whether this is to bolster prices, or lead to Saudi Arabia tweaking the production valve to compensate, especially if Chinese oil demand becomes a reality. Although it’s a little too early to see the impact on Middle East producer programmes, players are still interested in seeing how ADNOC and Saudi Aramco’s acceptances come out for March, with the expectation of less stem availability, especially as Ruwais is meant to be shutdown for maintenance throughout most of the month, Ras Tanura is not firing on all cylinders yet, and Yanbu continues to be Yanbu, in other words difficult to really know.

When the Middle East stutters forward with likely cutbacks, the market tends to look a little more closely at butane, especially as we are weaning our way off winter propane demand at this time of the year. Butane is already at parity with propane, and might flip to a premium very soon, while sellers of split cargoes are now looking for premiums. This is boosted by the sudden jump in the U.S. normal butane price, up by more than 12%, to end the week at just shy of 133 c/g, after beginning under 117 c/g. The market put it down to one big buyer showing their hand on Wednesday, and as U.S. normal butane is not cheap, traders will struggle to make up any Middle East shortages with extra tanks of reasonably priced U.S. butane.

Now to propane, and another week where buyers are a little concerned as to how they should weigh-up the ending of winter demand, carrying high priced stock forward, and the arrival volumes and timing of cargo supplies. As always it tends to bring players to the front of the curve, and the market ibn Asia has remained relatively sturdy, as bids slip comfortably into the second half of March/ early April at good premiums. March/ April time spreads have gained nearly $20/ Mt on the week to end in the mid $50s/ Mt, with April/ May also improving from $17-18/ Mt on Monday to just under $25/ Mt by Friday. Physical buyers have been paying March FEI +$80/ Mt. Despite crappy margins the Chinese PDH buyers are certainly coming to the table, some fixing, some not. The same can be said of flexi-cracker buyers. So even if the word “cancellation” has entered the market debates, at least this time it’s not those of a U.S. export type!

Back in the U.S. there was a pretty strong draw in the weekly EIA propane report, but with stocks up on previous years in most cases and down in very few, you just have that feeling we’re not in for any mad rush upwards in Mont Belvieu prices. Famous last words! The focus is more on the level of terminal fees as export availabilities are tight, especially getting earlier stems at this time of the year. Numbers range from 8 c/g all the way up to 14 c/g, dependent on cargo fit. The ARB and netbacks, especially from Asia, are conducive for business, but getting the right dates in the U.S. to match the right dates in Asia, the right ship and so on, is less easy. The freight market feels the same, as earlier ships have already been fixed, and it’s here in this period where the deal economics stack-up but the stem and ship availability don’t. It’s always been the Achilles heel of the LPG trader!

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