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The King and I

I have to admit I’ve managed to escape the hullabaloo of the King’s Coronation to find sand, sea and a fair amount of sun, off the western coast of Africa. No signs of bunting here, but I do hear more than the odd English accent. Talking of King Charles III reminds me of a time I was working at Texaco in London when the Chairman, Peter Bijur, popped his head around my office door and asked me if I was free to have lunch with Prince Charles. Of course, I said yes, and my first thought was how my mother would dine off this for many years to come. We reached the Intercontinental Hotel and walked to the table, then it hit me, yes, I was having lunch with Prince Charles, but so too were 500 other industry leaders.

Back on the high seas the action has been hotting-up in the waters around the Straits of Hormuz. We all know that despite the oil sanctions with Iran still being in place, they are not physically being enforced with any great success. Therefore, as the geopolitical manoeuvrings of the last few weeks have gathered pace, the U.S. had to reassert some sort of visible presence, so following receipt of the applicable court order they seized the Marshall Island’s flagged “Suez Rajan”, and the cargo of Iranian crude oil on board. As before, this led to recriminations from Iran and of course a tit-for-tat response, with Iran seizing the vessel “Advantage Sweet” that was carrying crude oil for Chevron, accusing it of colliding with another vessel. Then footage appeared of a dozen, or so, Iranian patrol vessels swarming the Panamanian registered oil tanker “Niovi” close to the Straits of Hormuz, then escorting the vessel back into Iranian waters near Bandar Abbas. Of course, the Iranian news agency Mizan confirmed they had received an order from the courts to impound. Let’s not get too caught up in the detail, it’s the broader picture we need to keep in the back of our minds. Muscles are being flexed!

I’m still not sure where U.S. oil production is heading, except politically there’ll be no desire to see output slip. The U.S. needs to remain in a position of crude oil surplus, trading its lighter crude oils for the heavier variety needed by its refineries, although the announcement by ExxonMobil of their Beaumont refinery expansion will be geared to local oil supplies, as it becomes one of the largest refineries in the U.S., on par nearly with the biggest in Port Arthur. But for the U.S. oil and gas producers the “jury is still out”, as recent EIA data suggests that the rapid growth in output in early 2023 is more a delayed reaction to the Russian invasion of Ukraine than any long-term expansion. Recent price slumps in both the oil and gas arenas are likely to cause a deceleration in U.S. production growth, and most are expecting this to show through by the time we get to the fourth quarter this year.

U.S. gas production has hit record levels, just below 6,000 billion cubic feet per month so far this year, up 7% on the same time in 2022, but inventories are very high as a result of a mild winter, and restricted export capacity have taken their toll. Although the number of rigs drilling for gas have remained steady at around 150 per week, this in itself will slow output growth, but with high inventories and low prices, the drilling activity may well come under downward pressure. As for crude oil, the record production levels of 2019, stammered by the COVID pandemic, look as if they will be finally surpassed when April EIA figures are released, with estimates projecting a figure of 12.4 MM Bbls/d. The EIA are even predicting this number as an average for 2023, even increasing to 12.8 MM Bbls/d in 2024. Well, let’s see if that materialises.

In the nearer term the oil market took a bit of a clobbering post May Day celebrations, yes, yet more holidays! There was something of a recovery by Friday’s close but the decline in prices is clear for everyone to see. The usual suspects were the cause, concerns over debt repayment issues for the U.S. and the good old Fed raising interest rates by another 0.25%. Mont Belvieu propane prices responded in unison throughout the week, ending around 68 c/g, an improvement on the 63 c/g level reached mid-week. But don’t be too despondent, Targa announced another fractionation unit (train 10) in Mont Belvieu, and Energy Transfer revealed they will invest in a further 250 M Bbls/d export capacity from their Nederland facility, 50% more than they have today, although a lot of the focus will be on ethane exports. So, the big players are certainly thinking it’s time to expand rather than contract in the NGL world.

There’s one thing predictable about the weekly EIA propane inventory numbers, and that’s their unpredictability, and this week was no exception. After the excesses of stock growth last week, this was of course a draw. The word correction comes to mind, but with all these holidays the system does get a little off course. I have no reason to change my view that builds will be the order of the day, and exports must respond. There was at least more to report on the propane export front, with the weekly number up to over 1.5 MM Bbls/d. And certainly, the focus again swung to the U.S. last week, as ships again dominated. Rates had eased a little to give some breath back into the market but not for long, as VLGCs started to get fixed, as much to take shipping cover as it was to match cargo with transportation. The shipping mathematicians quickly threw out a number of over 90 VLGC liftings from the U.S. in April, way above the 60 or so I remember only three or four years ago. And then came the reports that first half June ships had all but disappeared. End result, rates are now back up around $135/ Mt, and are unlikely to fall anytime soon.

At least the ARB appeared to respond, well to be honest it was a bit of an up and down week. The market needed to see $170/ Mt plus numbers, but it kept sliding back down into the high $160s/ Mt. This meant that buyers in the U.S., who were less hesitant fixing ships, were the opposite when it came to buying FOB cargoes. Even with a notional 5 c/g clearly negotiable by sellers, buyers remained convinced it was better to wait and let things settle. No body really believes there will be an export cargo shortage.

As for Asia it was pretty much a holiday induced market lull. There were a few Chinese PDH buyers and the odd petrochemical player in Taiwan in the mood, but the window, and outside of it, were pretty much asleep when it came to deals done or even the process of negotiating them. Europe was getting a little more life as many traders realised that the big imports from the U.S. in April, and early May, were likely to be less as we get into later May and the first half of June. With propane/ naphtha spreads still around $150/ Mt it was time for a degree of up-selling as bids and offers moved higher.

So, it’s a weekend that will see the rare event of King Charles III being officially made King in his Coronation, lots of pomp and ceremony, dignitaries galore, and of course the chance for the industry to have yet another holiday, in the UK anyway.

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