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Slippery slopes!

As you are probably aware, those in the know, or those who want to know, have headed for the Swiss ski resort of Davos on the annual World Economic Forum gathering. If you’re there already I guess you don’t need to read the next paragraph or two. As political and economic leaders were arriving, they felt as if the world economy was taking the ski-lift up to better-than-expected economic growth, bullish stock markets and generally rising optimism. But then comes that anxiety we all tend to feel when we reach the top of the mountain and click into our skis. For policy and decision-makers it’s the concern of all the geo-political tensions carrying-on in many parts of the world, Ukraine in Europe, the Middle East and let’s not forget the impact of low water levels in the Panama Canal on shipping and the supply chain, so critical in lubricating the global economy. And then there’s Donald Trump’s victory in the Iowa caucuses, and what his likely election to the U.S. Presidency will mean for all things we tend to take for granted, such as normal rule-based systems and traditional alliances. Remember what happened to trade with China, which of course seriously impacted LPG, and would do again, just as China’s economy also looks like it is stabilising, and what that will mean for PDH economics, propane buying and the whole global LPG picture.

First down the slopes is the European Central Bank President Christine Lagarde, and she’s warning of caution as she takes the greener ski runs, of hidden inflation that might easily take us back off-piste again. As market analysts and their followers predict even earlier interest rate cuts than anybody had really anticipated a year ago. It’s by itself fuelling those listening, to increase their buying habits, re-kindling inflationary fears. Just this week the U.K. were looking forward to announcing lower inflation numbers, instead it went up to 4%. Markets were certainly more enthusiastic than the policymakers, already thinking of the apres-ski than digging those edges deeper into the icy slopes!

Despite the goings-on in the crude oil markets usually grabbing most of the headlines in the energy world, it’s still important to keep an eye on the natural gas and LNG sectors. Last year saw record pumped-up price levels suddenly drop dramatically. We’d been up nearer $10/ MMBtu for Henry Hub natural gas in August 2022, but mild weather and roaring production soon took the wind out of these sales, as Henry Hub was at risk of slipping below $2/ MMBtu a year later, and today is struggling to even hold around $3. As for 2024, well hope has faded of any significant bounce back, in fact Wood Mackenzie are even suggesting prices will fall further. They see European demand, that dropped 7% in 2023, is likely to fall again given renewables and the expansion of nuclear options. We might not see any significant change in LNG volumes in 2024, but Asian demand is not blowing away any of its recent cobwebs. Yes 2024 will see a deluge of new LNG vessels to add a bit of spice to the sector. And we are already seeing prices slip down nearly 15% in Europe this year, even with cold weather and a lack of wind for the turbines to flourish, the high stock levels are winning the day. The picture is slightly more bullish in the U.S., as cold weather grips most of the country pushing up demand, and freezing in natural gas production, but nobody is really expecting it to last.

As for the LPG world, you’ve had to be careful blinking, just in case you missed something. Again, it’s the freight levels that have continued to head south, a dozen days in a row of declines, and pretty hefty ones as well. When you look at daily rates, we’ve seen a drop from $130,000 plus at the start of the year to barely $30,000 per day, equating to a Houston to Chiba rate of just about $100/ Mt via the Panama Canal, and it’s the Canal that’s enabling more VLGCs to get back to Houston earlier than anyone was expecting. As other ships have cut a new route to their destination it’s meant that gaps in the Panama Canal programme have appeared and more slots have been auctioned, dare I say it, at far lower prices, now barely $100,000 a slot, and you know how VLGC ship owners and operators like a relative bargain. However, what’s been of greatest concern is getting the cargoes when you arrive in the U.S., and with the ARB getting squeezed, murmurs of cancellations in February, and another week of Arctic weather temperatures across the whole of the U.S., it felt rates were still going to slide further.

Traders have been forced to take matters into their own hands, and whereas they’ve been slowing down on the less profitable trading and simply chartering out ships to third parties for hefty profits, now they’re back as FOB buyers. FOB cargoes are around, there’s space at the export terminals, so if the ARB can open up so can more fixtures, it’s just required this incredible drop in rates of 50% plus in a week to make such deals potentially possible. Of course, the eager eyed exporters and resellers have spotted the trend and have pushed asking numbers up to 10 c/g for first half February stems, and near 7 c/g for second half. Doesn’t seem as if cancellations are going to be that common, now does it!

But this might just be a small blip, as weather projections in the U.S. are calling for a warming of temperatures in the next week, although the following EIA report will likely have added winter demand numbers hidden somewhere in the algebra. As for this week a 2.8 MM Bbl drop in stocks is a little under expectation, while exports have been holding in there at nearly 1.75 MM Bbls/d. Also, those caught with shorts, and why do I say they were probably in the Enterprise non-TET system, well because the price there has been more than a few cents/ gallon above TET and other non-TET, suggesting a few players were forced to buy barrels to cover their positions.

In the meantime, Asia has had a quieter week than last but there’s still been a few more bids hitting the Window than offers, especially as prices dipped into the flexi-cracker range. Whereas we had been seeing discounts to February FEI, the cash differentials started to move higher into backwardation in the plus $3-5/ Mt range. A degree of much needed normality for this time of the year. But trying to read more than this into the market might be a little premature.

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