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The plug’s been truly pulled on the Panama Canal!

I really thought if I was going to be talking about waterways this week, it was more than likely going to be the Straits of Hormuz, due to a probable escalation, involving Iran, of the Israel/ Palestine crisis, or maybe even ISIS activity in the Sanai Peninsula of Egypt, affecting Suez Canal transits, but I should have known it would be the Panama Canal making the news yet again, and certainly it’s having a huge impact, I repeat huge, on LPG, especially the VLGC market. Again, it raises the question of how climate change can affect various sectors of the energy business.

Last month was the driest October for the Panama Canal on record, and that’s in a year that has seen a drop in rainfall of over 40% so far, resulting in unparalleled low water levels in the man-made Gatun Lake, a lake that not only supplies the Canal’s lock system, but also over 50% of the country’s water requirements. To put it into some sort of perspective, each VLGC transit requires 52 million gallons of fresh water, which is greater than the daily requirement for New York City. And ultimately the last lock pours the fresh water back into the sea anyway. Clearly the writing has been on the wall for a while, and it’s meant the introduction of stricter transiting numbers, with more announced this week covering the next four months, which may go on for longer if the rains don’t return in abundance.

With the expansion of the Canal about 8 years ago, the maximum number of vessel transits were increased to 40 per day, but now 32 transits are allowed to pass through the Canal, and by next week this will be cut again to 24, and over the next 3 months will whittle down to only 18 vessels per day. Add-in the fact that heavy protests against mining rights are closing roads and restricting vessel spare parts reaching ships on time, as well as disrupting crew changes, it’s therefore no surprise many shipping companies are looking at alternative routes, not least VLGC owners and operators. LPG ships only account for half the number of bulk ships transiting the Canal, and they also lie behind container ships and product tankers, and although more VLGCs transit the Canal than LNG or crude carriers, the fees are greater on the larger ships. So as far as pecking order is concerned VLGCs are pretty much bottom of the pile. Then throw in the fact that more than 90% of VLGCs loading out of the U.S. Gulf would choose to head to Asia via the Panama Canal, and you can see the problem. A voyage of roughly 30 days via the Canal, turns into 40 days via Suez, and 45 days via the Cape of Good Hope. So, with the heaviest delays normally coming in the month of November, with 2022 seeing 16-20 days on North/ Southbound journeys, you can see why rates are already so high and are about to skyrocket. Why? Because of the extra cost of waiting time, the crazy spot transit fees ($2.85 million paid by one VLGC owner this week), the more ton miles of alternative routes, (therefore making available ships later and less able to carry the 5-6 full cargo loads per annum they were able to do a few years back) and so on, and so on, but more later.

In the meantime, oil companies in the U.S. continue to squeeze more oil from the wells they have already drilled, side-stepping the concerns of a recent fall in the number of rigs employed. Crude oil and condensate production reached 13.1 MM Bbls/d in August, above 2019 levels. Output has continued to rise despite prices falling back from the peaks following Russia’s invasion of Ukraine. I don’t wish to be boring, but that’s one of the actions the oil companies are doing, boring much longer laterals to increase recovery and production. Also, natural gas output was 3% higher than the same time in 2022. We keep being told about let-ups in the forward production profiles for both crude oil and natural gas, but we keep being surprised that, if anything, these slow downs are moving further away not nearer.

I think most market players this week looked at each other with a degree of astonishment when they heard the news out of Panama, the writing may well have been on the wall, but now the wall had pretty much collapsed on them. For traders who normally go in the VIP entry at any fancy night club, they were now facing the shipping equivalent of being shown to the back of the line, or even worse told to go somewhere else. It looks as if, in the busiest time for the LPG world, around half of the normal Panama Canal transits for VLGCs will just disappear, and no new slots will be allocated to VLGCs before February next year. Around 70 VLGCs transit the Canal on a normal month, but now half of them will need to find another, much longer, much more expensive, route. In addition, ships are just not going to make the dates allotted them for loading out of the four major export terminals along the U.S. Gulf coast. Some have even suggested taking on the Magellan Straits short cut around South America, a risky passage given extremely strong currents and requiring compulsory pilotage, although at least it is summer down there. This means we will see loadings delayed, there’s just no way around it. Simply put, the freight market is already tight and there’s not a fleet of VLGCs just waiting on the sidelines. So, a market last week struggling to find U.S. export FOBs could well be flooded with cargoes, it’s already started. By next week re-sale levels will surely drop, and inventories might not be falling as quickly as local players might wish. Of course, this means a rough ride for Mont Belvieu as it must surely drop relative to crude oil, and of course relative to the Asian market. The ARB might widen further, but without ships it’s going to be a struggle to increase exports.

In the meantime, a conference in China this week simply upheld the woes of the PDH market, making seasonal buying the key for what happens next. Yes, buyers are extremely concerned that supplies will be delayed, and this will be reflected in the market, but how concerned will they actually be? If you look at the physical market there was little reaction, however the paper market went into a spin, with December/ January FEI swaps doubling in only a few hours trading on Tuesday. The paper ARB also jumped wider by $70/ Mt at one stage, but there wasn’t anything coming through in the market on the buyer’s side to hold it up, and the ARB fell back $20/ Mt by Friday’s close. Pretty much the same happened on the FEI paper swaps. More players were cottoning on to the fact that demand is not really there, not yet anyway. And this might well usurp what on paper is a pretty dramatic event. Questions will be asked, who’s going to pay for the near $100/ Mt increased freight cost? Will the U.S. producers simply let LPG sit in storage, they might have to anyway, or will freight levels jump so high that we’ll even see pressure ships heading from the U.S. Gulf to Asia to fill the slack. I doubt it but never say never in this LPG market! As for the VLGC rates, they’re up at around $240/ Mt and are likely to go higher, and higher!

I also wanted to wish Chris Stedmen well, one of many really nice people in our industry, who I followed at Texaco and worked with in Petredec for many years. It’s reported that he’s sold his shares in Petredec to the Fearn family and Bahri. I think it looks a good deal for all concerned.

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