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Freight rates buoyed by winter demand, port delays

This current feature was extracted from the latest edition of Poten’s LPG in World Markets, a monthly service published November 7, 2021.

VLGC freight rates increased in October as chartering activity picked up during the second half of the month driven by wider arbitrage between the US and Asia and increased buying interest from Asian players ahead of the peak winter season. In addition, logistical constraints tightened the VLGC supply and demand balance, lending support to spot freight rates for both US Gulf and Middle East loadings.

Spot freight rates for the US to Chiba via Panama Canal increased by about $15/t in the past month reaching above $98/t amid wider netbacks between the US and Far East. Delays at the Panama Canal rose to 17 days southbound and 18 days northbound for unbooked vessels on 8 November. In addition, there have been delays at some Chinese ports. These factors have contributed to the increase in US to Chiba rates. The delays are tightening the overall shipping supply/demand balances which has led to an increase in Ras Tanura to Chiba rates as well. Rates for this route rose to $57/t in the first week of November, $12/t higher than a month before.

Weekly spot VLGC freight rates

Arbitrage economics between the US and Far East have improved since the first week of October, boosting the outlook for exports. Lower propane prices in the US are part of the reason for this as the US Energy Information Administration reported increases in propane inventories for three weeks in a row, which eased some concerns about US propane supply during the winter months. Propane prices fell 10% by the end of October from the multiyear high on October 4. Although average Mont Belvieu price at $753/t in October was 12% higher from the previous month and 180% higher than a year ago due to low inventory levels.

On the other hand, the US National Weather Service is predicting above-normal temperatures in parts of Northeast and the western half of the US in November. Meanwhile, several US midstream companies including export terminal operators assured the market during earnings that there should not be a propane shortage even with cold weather.

Arbitrage between US and Far East should remain open in the coming months on expectations that Far East prices will remain relatively high in November as cold weather boosts demand. The sharp increase in Saudi Aramco’s November propane contract price (CP) was set at $870/t, $70/t higher than October CP. This increase was much higher than market expectations and should also lend support to Asian prices over the next month. However, the long delay at the Panama Canal could negatively effect FOB buying interests from the US Gulf and limit upside to freights.

Spot LPG exports from the US to Northwest Europe and the Mediterranean region remain limited as traders favor sending US barrels to the Far East for higher margins. Demand from the petrochemical sector is muted as propane is trading at a premium to naphtha, while term cargoes are sufficient to meet retail demand with mild weather so far.

There are concerns that high LPG prices will cut demand from the petrochemical sector as ethylene and propylene producers reduce operating rates due to extremely poor margins. High consumer price and supply-chain disruptions could also curb demand for finished products made from plastics and force plants to reduce operating rates. This is reflected in swap prices as propane prices are either flat or trending down from December then falling sharply in all regions starting in March.

US arbitrage economics

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