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The crackers are back!

We’re bracing ourselves for “escalation” in the Middle East, and while each side are adamant they don’t want to see this happen, there’s an increasing number of direct and indirect attacks being given and taken by U.S. forces and Iran counterparts, including nasty assassinations. Rocket and drone attacks against U.S. troops are emanating from Syria and within Iraq, hitting the Al Asad base in the western part of the country. It’s certainly provocation and it begs the question of doing nothing is a sign of weakness, doing something is likely to fuel the very such escalation, everyone is trying to stop. Even the attacks on Houthi rebels in Yemen has the Biden administration tinkering with potential military campaigns, not just responses. Hezbollah forces in Lebanon have been relatively quiet, but you just have that feeling it may not last and a direct strike may well take place. Iran firing on Pakistan, Syria and Iraqi Kurdistan might not be direct attacks on the U.S., but it feels as if there’s intent to get as close as possible to each other, and we all know that one rocket misfired could end the lives of Americans, and however hard President Biden tries not to be brought into a direct escalation, he may soon have to.

Since I wrote the paragraph above there’s now news that one of Trafigura’s petroleum product tankers, “Marlin Luanda” has been hit by a missile and set alight off the coast of Yemen. The Houthi rebel’s military arm is claiming their naval forces carried out the attack, and it’s believed by the U.S. to have been one anti-ship ballistic missile. No injuries have been reported but firefighting equipment had been deployed to try and extinguish the flames. A slight sting in the tail is that the vessel was carrying Russian naphtha, bought below the price cap, and is therefore in line with the G7 sanctions. A Vitol ship carrying crude oil smartly turned back after hearing reports of the attack. Both U.S. and U.K. governments have stated this is unacceptable, David Cameron, the U.K.’s Foreign Secretary is on a Middle East diplomatic mission to reduce tension, but with both countries reserving all rights to respond, how do they respond without upping the ante, and therefore substantially increasing anxieties. Even China’s timid reaching out to Iran to restrain the Houthi’s has done little to reduce such strains.

Outside of the geopolitical arena, the economic news has in fact been on the positive side, especially in the U.S., and this was also a bullish catalyst for crude oil prices. There was a stronger than expected U.S. growth number of 3.3% in the fourth quarter of 2023, while many had expected closer to 2%. This was further backed up by numbers suggesting that inflation was at least under control as the personal expenditure index slipped back a little. China’s economy also showed signs of recovering, as the People’s Bank of China made moves to significantly cut bank reserves, which should inject around $140 billion into the banking system, signalling at last an economic stimulus package worth writing about. The only small negative was that Europe’s central bank maintained its record-high 4% benchmark, and we’ll all have our eyes on the Fed’s decision on rates next week. So, no surprise Brent has pushed through that $80/ Bbl psychological threshold. The EIA in the U.S. reported a larger than expected drop in crude oil inventories to the tune of 9.2 MM Bbls, with the extreme cold weather most likely being the dominant cause. Both crude imports and production dropped, the biggest in over two years, and even though the weather is moderating, many believe the impact will take some time to be weaned out of the numbers.

As for LPG, it’s been another one of those weeks of mental frenzy for the traders even if the actual activity is still a little on the slow side. The key area for me is on the demand flank. We’ve been regularly saying in Simon Says how the seasonal demand in Asia has been diluted by above average temperatures, negative PDH margins, and a less than rosy economic reality, feeding back along the supply chain, through shipping (despite significant increases in voyage times), and back to the exports in the U.S. and the Middle East. All have been affected, but now there’s a degree of light maybe, or is it just a flicker? Finally, I can report that the “Crackers” are back, and I’m not talking the “fire” ones in anticipation of Chinese New Year, I’m talking the “flexi” petrochemical variety that has increased in capacity in Asia over the last decade. Only this week the FEI/ MOPJ swap has moved from $60/ Mt in favour of propane, to over $90/ Mt, and as we all know, a feedstock buyer can’t resist a bargain. So Taiwanese, Chinese, Korean and more feedstock buyers started gobbling up cargoes in the MOPJ minus $40-50/ Mt range. At last, a demand segment had come to life, but however positive it might be, it still didn’t trigger others to follow. The Asian “window” was practically lifeless, albeit it isn’t the mainstay of feedstock buyers anyway. Some physical cargoes did move and were fixed at higher numbers even though still small discounts, while the swaps market saw the March/ April spread practically halve by Friday.

As for Europe the propane/ naphtha spreads also widened from $115/ Mt to $140/ Mt in favour of running propane. But this didn’t really spark activity. Not only are temperatures warmer than average again, causing a lot of the dip in propane values (as against any significant jump in naphtha prices, although there was some strengthening), but the subsequent ARB from the U.S. therefore remains closed. So, the crackers may like to buy but the closed ARB means they won’t find any sellers despite the extremely low freight rates.

Did I say extremely low freight rates? Well, the Houston to Chiba benchmark has fallen to its lowest in eight years. Of course, the simple answer is there are too many open ships, probably 20 or more in the Middle East, and more than 10 open in the U.S., with some likely to wait until March to find stems. Amazing really when you think about it, how we have gone from VLGC famine to feast in such a short period of time. But with no additional winter demand surfacing in Asia or Europe, there isn’t the pull of cargo out of the U.S. and the Middle East, then when you add in stock issues in the U.S. and cold weather refocusing U.S. player’s attentions domestically, coupled with OPEC cuts, the fears of Cape routing for VLGCs delaying deliveries becomes yesterday’s issue, not todays!

For the U.S. market it is starting to recover from the severe, but relatively short, cold temperatures of the last couple of weeks. Yes, there’s been more demand, but it’s the impact of having to shut-in production, and the affect this also has on gathering LPG from Conway, or STACK, or SCOOP (just love those acronyms!) and transporting them down to Mont Belvieu. Hence the shortages on the non-TET system, resulting in premiums of up to 4 c/g over TET. So, this week’s EIA report has been dramatic to say the least, with an 8.4 MM Bbl draw, the largest for eight years! The exporters and resellers are starting to flex their own muscles as well, pushing February and March terminal premiums closer to 10c/g and above. VLGCs certainly need cargo, but for how long? Surely the cycle may turn quicker than we expect, and sellers will again be looking for ships.

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