Analysis: Floating US LPG storage unlikely

OREANDA-NEWS. The overhang of US LPG supply is unlikely to create a waterborne storage arbitrage opportunity like the one crude traders are currently using.

Higher futures prices for crude, limited onshore storage and lower tanker rates have prompted a number of companies to load ships with crude to wait for delivery when the oil prices recover from their current lows. This floating crude storage opportunity has occurred during prior steep drops in crude prices.

Floating LPG storage has been historically utilized in Brazil and Ecuador, and occasionally closer to the US in the Caribbean. But the logistics costs, namely contracting for tankers to hold the LPG, are still too high to make a floating storage deal work in the US.

Propane stocks in the US are unseasonably strong this winter, as ongoing production surges and a closed export arbitrage have led supply to outpace takeaway since the beginning of the demand season in October. As of the week ended 23 January, nationwide propane stocks now stand at 69.308mn bl, 65pc above the five-year average and 119pc above the level seen during the same period last year, according to the US Energy Information Administration (EIA).

Concerns for inland storage capacity have mounted following brine contamination in nearly-full caverns last August. Storage levels for lessees in Mont Belvieu terminals were monitored daily by operators, and nationwide stocks eventually ballooned to 81.612mn bl in mid-October, the strongest level on record since the EIA began monitoring propane ending stocks.

Current VLGC spot availability is sparse and spot freight prices are in a bull run. This is leading shipowners to capitalize on favorable market conditions before a growing VLGC fleet chips away at high utilization rates. The global benchmark for spot VLGC shipping rates, which measures the cost to move a vessel between the Mideast Gulf and Asia Pacific, has surged 37.6pc since the beginning of the month and now stands at \$86/t.

Current VLGC utilization in the western hemisphere is so high that most shipowners are looking for time charter commitments at a two-year minimum. Global utilization was pegged at 98pc in 2014, and wild swings in the market moved freight costs between a \$101/t range throughout the year, from a low of \$42/t in March to a yearly high of \$143/t in July.

But the current fleet, which contains an estimated 168 vessels, is projected to grow to 205 vessels by the end of this year, and will be up by about 46pc from the 2014 level by the end of next year, when an additional 40 newbuilds will bring the total fleet to 245 VLGCs. Growth to the fleet will likely dampen the historically strong spot freight price environment.

This week a rare one-year time charter was booked to a trader for a Panamax VLGC, the Ronald N, at a reported rate of \$2.8mn/month, or roughly \$92,000 per day. The rate was particularly high because the vessel is one of a limited group of LPG-capable Panamaxes, and the higher premium will be lost once the Panama Canal expands in the first half of next year.

Current asks for a Panamax spot move, in contrast to a one-year time charter, is significantly higher with an equivalent rate of about \$3.7mn/month, or \$122,000 daily, with an asking rate of \$60/t.

The time charter equivalent daily rate for a more standard VLGC currently stands at about \$42,750 per day, based on a recent 3-year time charter deal. But even at the lower rate, the propane forward curve still discourages a waterborne storage play.

A VLGC typically holds 550,000 bl, or 23.1mn USG. At current Mont Belvieu propane values of 46.75?/USG, the cash price for a full VLGC cargo stands at \$10.8mn. At this rate, the total cargo cost would be sunk after just under eight to nine months, or about 253 days.

Wednesday's propane forward curve showed a slight 3.625?/USG contango between nearby prices and the propane value eight months ahead. Logistics costs would more than outweigh any chance to play a time-spread arbitrage.