Gas Tanker by Monray
Arbs have no predetermined logic, they arise from the freewill of the market. After Fukushima and a subsequent shutdown of the japan nuclear power industry, Japan has been buying 120 LNG cargoes/month. Consider Japan PM Abe turning-on its nuke power plants overnight… It would be a shocker for both gas carriers and LPG waterborne exports demand.
In LPG, the East-West arb is weakening with the exception of the USG. May/Jun VLGC Seasonality appears fully priced. Markets believe that reduced LP demand will drive cash prices lower in the West during summer and assume East will keep buying steady. I also note that Saudi Aramco’s biggest competitor in the LPG market is freight, with Baltic VLGC spot rate assessed at $128/mt while Japan/Gulf LP spread is below $122/mt… The weakness in the spreads isn’t priced in the Baltic panel freight assessments. I believe opportunities are now likely to appear, look for softer activity and rates in May.
Because, tonnage is very tight, charterers are price-takers. LPG fleet owners have an opportunity to lock their rates for the rest of the year at a record high. For fleet owners, I think value now is in the top of the range. Consider a typical LP tanker needs a $30,000/day break-even, we are in a free-market, you or others can either pay the market rates above $100,000/day or build a new one at a fraction of the cost. I’m skeptic of this LPG hype in general, especially in terms of freight, because the same conditions are reunited to repeat the LNG rates dramatic experience during 2013 (which haven’t found a price floor).
The U.S LP Arb in perspective.
Conditional to have a loading date in Houston and to get a cargo without unusual circumstances arbs seem to be positive. (see the LP Arb ARA/USG/ASIA and the LP Marine Trade, Timing and Location are Money. However, berths for LPG cargoes are extremely limited in the USGC. Targa Resources and Enterprise Products Partners LP terminals have only capacity for 8 VLGCs cargoes per mths each. Among the reasons for the U.S LPG discounts on world markets are:
- the surge of NGLs production from the shale gas drilling.
- and a LPG infrastructure jam-lock in the Gulf Coast.
The market is also telling that the latter one is unlikely to prevail after 2014.
The OPIS propane swap Futures Curve for Mt. Belvieu, TX and the ARA C.i.f /Houston f.o.b implied swap curve are already pricing the easing of the U.S Gulf LP Bottleneck in early 2015.
If you like research notes presented here, please share !
Navigating the commodities markets with Freight and Spreads