The party’s maybe over?

It was something of a nostalgic return to London for IP week, back for the first time since COVID had made it a virtual event, which of course lacked all the glitzy parties, glamourous cocktail bars and luxury 5-star hotels on Park Lane, that had made the event the biggest individual annual gathering (party) of players in the oil and gas industry. Although, I was told the hard core had still gathered last year in the less flashy pubs of near-by Shepherd’s Market. But the tone has changed, including its name of course, with its organisers rebranding the get-together as International Energy Week. I heard the conference itself was now more about energy transition than the good old oil and gas exploration, production and refining. In fact, as I reached the Intercontinental Hotel on Hyde Park Corner on Wednesday, I was greeted by barricades and more police than at a division 1 football game. I thought the King must be here, and I don’t mean Jim Teague by the way, but no, it was in anticipation of protest group activists assembling to disrupt the conference in order to get their strong views on fossil fuels across. I’m not sure they made it.

The conference timing was well judged. Crude oil prices have been showing signs of inertia since the start of the year, with Brent hovering around $85/ Bbl, and the big trading players have been in chorus expressing the notion that worldwide demand, bolstered by the rejuvenation of Chinese economic activity, was going to hit record levels this year, especially with an expected soft landing, after what were originally pretty strong fears of worldwide recession.  The bulls in the market are trying to shy away from the impact of less Russian oil and gas, after recent sanctions on crude oil and refined products didn’t cause any real surge in prices, more a damp squib!

As far as the markets this week, Brent appears to have reversed the streak of weekly losses, buoyed by the feeling of a significant demand bounce back in China. A government report from there shows that manufacturing activity in February had grown at the fastest pace in more than ten years. But there’s a divide growing between East and West, as for yet another week, ten in fact, the EIA crude oil inventory numbers in the U.S. grew again, pushing stocks from below 5-year averages to now nearly 10% above. Bears have also pointed to European inflation levels increasing to 8.5% in February. On the supply side OPEC announced that their total output had increased, mainly on the back of Nigeria ramping up its production to the highest levels seen this year, conveniently just before the election of their new President. There were noises of the UAE leaving OPEC to pump more oil, but this was apparently refuted, as you’d probably expect.

In the meantime, despite the re-start of Freeport, LNG exports from the U.S. remained pretty much the same in February as they had been in January, but of course you could argue there’s three days less loadings. About 100 ships loaded in each of the months, that’s just under 7 million Mt equivalent of LNG, but versus last year we’re are up 10%. Over two-thirds of exports headed to Europe, while Asia was down to around 15%. In the meantime the expectation of the U.S.’s second largest LNG export terminal getting back in business, coupled with some erratic weather in the U.S., has at least moved Henry Hub pricing back into the green, but it’s still below the $3/ MMBtu. In Europe the Dutch TTF natural gas price continues to meander downwards from over $18.50/ MMBtu at the end of January to less than $15/ MMBtu today, although some still argue that is relatively higher than the sub $2/ MMBtu the market experienced in 2020.

As for the week in LPG, I think the market is starting to dip, albeit it was not the most active of weeks. But we are now clearly beginning to face the shift from winter to summer demand, whatever our thoughts are about the likely macro improvements in China. We were getting a taster last week when the bid/ offer range on several trades widened. Just because buyers and sellers don’t agree for a week doesn’t mean the whole market halts, cargoes still need to be sold and cargoes need to be bought, the conveyor belt will ultimately always adjust its speed.

Saudi CP was released, down, but certainly not below expectations, and there’s nothing like a CP announcement to take the fizz out of the Asian market. Buyers are just harder to find at this time of year, and it’s starting to show. Nobody was revealing their hand in the “window”, and for that matter outside. There was talk of rolling cargoes from March to April, another sign of weakening sentiment. On the physical cargo front the few PDH and flexi-cracker buyers who had shown their heads, were hesitant in buying. A Taiwanese petrochemical buyer did step up to the mark, a mark $40/ Mt below April MOPJ, Asia’s naphtha index, but one Chinese buyer ducked under, feeling offers were too high.

With crude oil prices on the up Mont Belvieu propane followed suit, in fact propane outperformed it’s big brother, with ratio’s nearly 10% higher in propane’s favour. I’m not sure what happened to normal butane. Monday it was towering at 140 c/g up 10c/g from the previous Friday’s close, then it was if the carpet had been pulled from under it, and by this Friday it was struggling to find much room above $107 c/g. Spec changes, who knows, but someone took a bath. In the meantime, a stronger U.S. propane price coupled with a weaker sentiment in Asia meant the ARB suffered. April narrowed by over 10% from around $195/ Mt to $175/ Mt, as the realities of the market started to become evident. There’s a natural transition as months change and the backwardation in the market clicks into a new period, but the pressure was felt in the terminal fee premiums and VLGC freight levels, both getting squeezed. Netbacks of 20 c/g a couple of weeks ago have now slipped to not much more than 5-6 c/g for April loading, and that’s had the same impact on terminal resales, now halved to something close to 6 c/g, when March premiums were closer to 15 c/g only a matter of days ago. Stocks may have come-off nearly 2.5 MM Bbls last week but they are way above previous years, and exports will need to start flowing soon. As for the VLGC market, we have seen an easing of rates from $160/ Mt to the low $150s/ Mt, but the Panama Canal transit delays have moved closer to the mid-teens, so although rates will probably ease further, the initial pressure will surely be on cargo re-sale levels.

As the conference circuit now moves on to San Diego and Tokyo the talk is going to hinge on whether the petrochemical buyers will come to the party quickly enough, and if all these new buildings are going to be full of LPG, then will there be enough of them?

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