After a week of continued missile attacks from Houthi rebels in Yemen against non-military ships passing through the Red Sea, on probably the most important trade route of all, the U.S. and its allies have hit back, launching more than 70 strikes against targets in Yemen, fuelling the threat of escalation. The Houthi’s have been clear that while Israel continues its campaign in Gaza then Israeli linked merchant ships will be targeted, although attacks, nearly 30 since the beginning of December, seem to be more indiscriminate in nature. With cargo ships forced to take the longer and more costly route around the Cape there’s a fear that if these actions by the Houthis are not stopped, the world economy will again wilt from yet another significant supply chain issue.
Most VLGCs are already taking the extended route from the U.S., via the Cape, to Asia and back again, especially with the limitations through the Panama Canal. And rates have been at record highs reflecting the extra costs involved, and more importantly, the reduced overall cargo capacity this brings. But that all went a little “Pete Tong” this week as VLGC freight levels collapsed, as traders realised that developments on the product side were quickly closing the magical ARB, well maybe not so magical now!
You would think this is bad news for Middle East producers, with ships unlikely to be just passing by ready to load, and that’s right, but there’s two indicators this week that might bring a degree of renewed optimism to the desks of OPEC oil ministers. It also impacts U.S. LPG output moving forward, especially as it is primarily focused on U.S. oil and gas production, buoyed over 2023, but not looking as healthy for 2024. There are signs pointing to a flattening, and even potential downturn, in the growth of output in the U.S., mainly in response to the lower WTI levels experienced over most of 2023, as the Russian/ Ukraine conflict’s impact on prices in 2022 has seen a drop of some 30% ever since. The rig count normally lags by half a year at most, and that has certainly eased back recently. As for production, well that gets totally out of whack, and has reached record levels at the start of the fourth quarter of last year, when the last figures were produced, again reflecting prices and decisions made in the distant time periods. That said, there has been greater efficiencies from horizontal drilling techniques, while smaller private companies have been looking to boost near-term production levels, but ultimately, you’re not going to beat price gravity.
The pendulum may well swing back towards OPEC. The signs of a production retreat for natural gas appear to be clearer, and again it’s the price drop that’s the cause, but without an “OPEC” trying to bolster prices, gas finds its lower equilibrium far quicker. Gas rig drilling has fallen by nearly a quarter in just over a year, and with excessive inventories to clear this might impact production even more.
So, it’s not been a good week for LPG ship owners as a whole. They’ve been facing all sorts of challenges, finding the quickest and safest routes, as Panama, Suez/ Red Sea and now the Straits of Hormuz become ignition points. I guess though our sympathy vote has been too strong as all this shipping mayhem has been offset by record breaking freight levels, more than reasonable compensation to say the least. But the LPG market pretty much cast aside its geopolitical stimuli and got back to the impact of the LPG pressures alone, both pushing it and pulling it.
The ARB is no more! It has ceased to be! It’s expired and gone to meet its maker, to adjust a famous quote by Monty Python’s John Cleese. An ARB that was already wounded by Friday last week at around $275/ Mt for February loading in the U.S., has been shot to bits by the following Friday, down more than $75/ Mt, with the life fully squeezed out of it. The ARB has been rammed from both sides, as I started to allude to last week, but the intensity is far greater. For all of this year I’ve been saying how U.S. domestic consumption, in both the traditional propane marketing outlets and the petrochemical sector, has been ebbing away percentage point by percentage point. The EIA says it was down 2% last year. But a blast of cold weather and it all goes haywire in Mont Belvieu. Certainly, the shivering conditions is an important catalyst, but there’s an even greater cause, to some extent swept a little under the carpet at the end of 2023. No less than a 9 MM Bbl downward adjustment in U.S. propane stocks, nearly 10% that we thought was there just disappeared overnight. The cushion has been well and truly tugged from under the market. Yes, we’re still where we were at this time last year when it comes to stock levels, but market aspirations are bound to adjust, fuelled by cold weather in many player’s backyards! Since the announcement Mont Belvieu propane prices have moved up from near 60 c/g, through 70 c/g at the start of the week, to finish perched on 80 c/g. Over the same time period WTI crude oil has if anything slipped down a dollar or so, hence the ratio that’s been slumped below 40% at Christmas time, is now closer to 50% some three weeks later.
That’s not good news for the ARB but is made even worse by what’s happening in Asia! Especially with Chinese petrochemical and traditional buying appearing to be drained of life, barely reacting to potential demand coming from Chinese New Year festivity planning and clinging on to crude oil prices barely murmuring. FEI flat prices had dropped from $640/ Mt coming into the week to $600/ Mt by Thursday’s close. FEI monthly spreads had also narrowed from around $45/ Mt premiums for the first quarter to less than $35/ Mt in just a few days. But at least by Friday there were signs of a resurgence of demand interest heading back into the market as players felt the price had probably adjusted a little too much, and with a closed ARB maybe players should still worry about supply, particularly given talk was still second half February. In fact, the window turned to bids for this period, with only physical cargoes finding any sellers, although still at discounts in the teens to FEI basis Chiba, but with a number of Chinese PDH plants enjoying the flat price fall and re-entering the market. In the end the market in Asia regained $15/Mt on the flat price side of the equation and spreads found a lot more strength at the front of the curve.
What a week for the shipowners. Freight levels last Friday via Panama to China were still near enough $220/ Mt, but by the following Friday we were not far off a $100/ Mt drop, struggling to find interest around $125/ Mt. Netbacks were slim, killing any route other than Panama, even negative for movements to Europe. Of course, there were the usual rumours of un-named Chinese buyers, with ships, willing to pay more than 6 c/g for a U.S. cargo, but the FOB re-sale market was at best asleep, unable to react to the freight nose-dive. To make matters worse for the shipowners, although it sounds a little paradoxical, the issues transiting the Panama Canal had forced so many high fee-paying ships away that northbound slots suddenly became easier to find, meaning VLGCs expected to take the longer route were appearing earlier on ship broker lists. The fact we are still deemed as being in winter might mean rates have done most of their freefall and may find more resistance at these significantly lower levels, but without the ARB expanding it’s going to be a tough call!