China and Iran recently signed a 25-year trade deal not surprising given that one is a major OPEC producer and the other one of the world’s largest importers of crude.
The deal is worth $400billion, including oil quotas and gives China ‘first dibs’ on Iran’s exports. This would produce a large trade flow from Iran to China, right in front of nose of the US, whose sanctions against Tehran have attempted to curb crude flows. This trade deal may potentially increase already boiling tensions between the US and China.
Since November 2018, when the US sanctions were imposed, Iranian production has halved from a high of 4MMbbl, which then resulted in a full on US ban in mid-2019. Behind the scenes China has still been importing Iranian crude through smaller companies that don’t deal out of the US, utilising ship-to-ship transfers in the Strait of Hormuz. This oil doesn’t cross official borders or customs and is put into bonded storage basically meaning the oil is in transit, while still being in the country but remains owned by Tehran. The slow build up seen around this time last year, is happening again, replenishing Chinese crude stocks with severely discounted Iranian oil, some estimate a discount of around $11 a barrel discharged from the VLCC Giessel.
In the paper market this trade deal should lead to regular shipments on TD3C and similar routes, travelling from MEG to China carrying the Iranian oil. The sooner the better for TD3C which at present is in a slump, with rates sitting steady around the low marks of mid WS-35, with little to suggest they will make any major movements in the near future. With 12% of the VLCC fleet still locked in floating storage, once these vessels become available, the already over supplied market will just become super saturated with vast amounts of tonnage and a small number of cargoes to fill the gaps. When this deal starts to gain traction hopefully it will provide enough volumes to counter act the pending supply glut.
LPG and LNG prices Soar
In recent weeks natural gas prices have been booming and are on the way back to the $2.50 level reached last December. With hopes of short term warmer weather being seen globally, traders acted on optimism and saw prices jump 20% in a day; evidently LPG and LNG is experiencing a bullish trend. Usually colder weather increases demand for natural gases for uses as heating fuel but recently with greater development and infrastructure, warmer weather is now driving an air condition fuel demand increase.
This trend can be clearly seen in paper LPG freight prices, a clear upward movement in spot prices since June, with the spot now around 64$/mt (as seen in the graph below) with each new trade of LPG or LNG testing higher levels. The LPG trend continues with Adnoc Logistics and Wanhua Chemicals launching a joint venture in UAE, known as AW Shipping. This venture will oversee the ownership and operation of a fleet of VLGCs and other LPG carrying product tankers, recently ordering three VLGCs this week from China.
It seems as the months continue, more news comes out about LPG and LNG growth in the shipping industry, with companies slowly realising the potential of these gas carrying vessels. Looking forward, hopefully the LPG curve will remain at high levels and see steady sustainable growth as owners, charterers, hedgers and speculators join the natural gas FFA party.