In our most recent LPG shipping update over at Value Investor’s Edge we touched on a variety of issues such as the recent newbuild ordering spree and the impact on 2023 deliveries, the US/China trading relationship, and an exciting development regarding Indian imports. But the section I found the most fun to discuss was the impact of OPECs crude oil supply cuts and the consequential impact on the LPG shipping market.
OPEC has achieved a high degree of compliance over the past couple years as they curtailed output to shore up oil prices. The benefits of which were conveyed in Saudi Aramco’s latest quarterly report which saw a nearly four-fold rise in net profits to $25b for Q2 of 2021.
As they curtailed crude output, they have also seen declines in related LPG extraction and recovery which has translated into reduced export volumes.
While export volumes are important what we are interested in is how cargo mile demand was impacted by this shift – and here we see very distinct results.
Source: VesselsValue – VLGC Cargo Miles Out of Middle East Gulf Region
When comparing data from VesselsValue for VLGCs from January 1 through August 12 for both 2019 and 2021, we see those volumes out of the MEG region have dropped just 2.7% over that time cargo mile demand has dropped 9.25%.
This would indicate that longer haul destinations for MEG LPG had been more profoundly impacted and/or found the greatest substitution prospects. Indeed, if we look at MEG LPG destinations, using that timeframe for comparison, we find declining export volumes to China, S. Korea, Singapore, and Japan just to name a few. Meanwhile, the greatest gains can be found in India (a much shorter haul in comparison) and the United Arab Emirates (an even shorter haul).
Over that same period, we have seen the US fill the gap in those areas while supplying even more to accommodate further demand growth. Again, using that same timeframe for comparison, we have seen cargo quantity exported on VLGCs increase by approximately 35% while cargo mile demand has increased 45%.
This cargo mile demand growth is not an anomaly, but rather a long-term trend which has been complimented in recent years by restricted alternative global supply.
Source: VesselsValue – VLGC Cargo Miles Out of USA
Here is the key point of all this: The LPG market is still growing and at a rapid pace in some of these nations. OPEC’s curtailed supply and the consequential impact on long haul destinations is not a negative for the shipping market. In fact, the US has acted as a substitute supplier to a large degree which has negated any major negative pricing impact that would affect demand, while at the same time presenting an even longer haul for many of these markets.
Furthermore, with shrinking (or stagnant being a best-case scenario) supply the MEG region continues to be unable to capture any further market share leaving most new demand which is occurring in Asia to be fulfilled by long haul US supply.
In short, OPEC crude cuts appear to be having the desired impact on crude prices and balance sheets. Therefore, this discipline and high degree of compliance can continue to be expected from cartel members. The consequences of this ongoing discipline should continue to benefit LPG shipping markets as US substitutions and longer hauls continue to play an ever-increasing role. Of course, on the other hand, a breakdown in OPEC’s discipline would have opposite consequences.
Finally, let’s also acknowledge that the likely resolve OPEC will display along with legacy E&P cuts globally will keep crude prices higher in the medium to longer term which will favor ethane over naphtha. This substitution will then favor LPG shipping demand over that of product tankers adding yet another element of strength over the duration of these high crude prices.