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LPG shipping largely unaffected by attack on Saudi Arabia

The recent drone attack in Saudi Arabia affected around 60% of the country’s LPG production. However, Saudi Arabia’s stockpile and increased exports from the US minimised the effect of the production cuts on the global shipping market.

The drone attack in Saudi Arabia on 14 September, 2019, in which oil installations were targeted, forced the country to shut down its key Abqaiq oil processing plant and the Khurais oil field, which took out almost half of Saudi oil production. As most of the LPG produced in the country is through associated gas production, about 60% of the country’s LPG production was estimated to be affected. Saudi Arabia exported 8.3 million tonnes of LPG in 2018 and 4.2 million tonnes in 1H19.

The LPG market experienced an initial shock following the attack, with LPG prices rising over 10% in Asia, but they soon fell after an assurance of continuing supplies from Saudi. The country also released their cargo acceptances for October loadings without any cancellations, which further eased market fears. However, Saudi Arabia delayed cargoes to countries such as India, which compelled the latter to seek additional cargoes from alternative sources such as the UAE in light of the increased demand before the Indian festive season.

Looking ahead we expect Saudi Arabia’s contract prices for October 2019 to increase over $50 per tonne from $350 per tonne in September. The increase in October will mark an end to three successive monthly declines in Saudi CP rates and will trigger renewed LPG trading activity in the market.

Any rise in Saudi CP prices will cause the US-Asia propane price arbitrage to expand, favouring increased exports from the US. The latter has a high propane inventory – over 100 million barrels – which is expected to keep domestic propane prices low. As such, the US can easily use the unused export capacity to cater to the increased demand.

Overall, we expect a rise in VLGC rates as the attack on Saudi Arabia will push more vessels to move towards the US from the Middle East. VLGC spot rates on the benchmark AG-Baltic route increased to $67.1 per tonne on 27 September from $58.7 per tonne before the Saudi attack on September 14. We believe VLGC rates will continue to rise due to the increased fixtures out of the US making vessel availability tight, while LPG trading activity picks up steam in Asia in the light of increased demand expectations.
Source: Drewry

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