Big Panama with a Purple Hat Band - Propane Price Squeeze, Panama Canal Rules Fluster Market

It’s been a chaotic start to the new year for propane. In the past 12 days, the Mont Belvieu price is up over 15%, closing on Tuesday at 87 cents/gallon — the highest since October 2018. The usual culprit of winter weather has something to do with it, but not just in North America. Over the past couple of weeks, frigid temperatures in Asia, along with supply cutbacks from the Saudis, have supported U.S. propane exports to those markets, further tightening the U.S. supply/demand balance. But as is often the case these days, the market has another complicating factor. Delays transiting the Panama Canal have stacked up VLGCs — the vessels carrying U.S. propane to Asia — on both the Atlantic and Pacific sides of the waterway, pushing up charter rates to levels not seen in years. And on top of that, new transit-scheduling rules from the Panama Canal Authority will shove VLGCs to the back of the line, potentially making it even more difficult to get through the canal without significant delays. Today, we’ll explore these developments and what they may portend for the remaining weeks of winter.

As we blogged about in November and December (Now You See It), the possibility for a propane price squeeze has been coming at us for several weeks. Even though the U.S. entered the propane winter season with healthy inventories, exports have been running at all-time highs and stocks have been declining rapidly. We were concerned that average days-supply, when calculated using both domestic demand and exports, had dropped to a five-year low, and that the market could get very tight, warning that “the wild ride for propane prices seen in the fourth quarter could get wilder still.”

And it has. In Mont Belvieu, as mentioned above, the price of propane blasted into the stratosphere during the first few days of the New Year, reflecting not only cold weather in the U.S., but skyrocketing prices in Asia due not only to record- or near-record-low temperatures in Japan, South Korea, and northeastern China, but also to shipping and global supply issues. We’ll get back to that in a minute. But first, let’s consider how propane prices have behaved so far in 2021.

As shown in the left graph in Figure 1, the price of Mont Belvieu non-TET propane on Tuesday was 87 c/gal, up almost 12 c/gal since New Year’s Eve. Way back in mid-November, propane was only 51 c/gal, so the price since then is up a whopping 70%. Note that c/gal prices are on the left scale. We’ve also included prices in dollars per metric ton ($/MT) on the right scale, since that’s the way prices are quoted in the global market. In those terms, Mont Belvieu propane is up from $265/MT in mid-November to $452/MT yesterday. The right graph in Figure 1 puts those prices in the context of crude oil, which (as we described in Now You See It) is the best way to assess just how expensive propane really is. And the answer: expensive. Propane is now almost 70% of crude oil, the highest it’s been since 2017 if you carve out the 12 days of crude price insanity in April 2020. Anything over 50% is on the high side.

Mont Belvieu Non-TET Propane Price and Propane to Crude Ratio

Figure 1. Mont Belvieu Non-TET Propane Price and Propane to Crude Ratio. Sources: OPIS, CME

Even though Mont Belvieu propane prices are expensive, propane exports have continued to sail from Gulf Coast ports to international destinations at record rates. The left graph in Figure 2 shows overseas propane exports from the Gulf Coast; it excludes trucked and railed volumes to Mexico. As we described in Now You See It, over 90% of U.S. exports move out of terminals along the Gulf Coast. Since mid-year 2019, Gulf Coast propane exports are up from about 1.0 MMb/d to about 1.35 MMb/d in December. The right graphic shows where those barrels have gone: 60% to Asia (blue bar segments), with the balance mostly to Europe and Latin America. And those exports to Asia have held up even though the price of transporting U.S. propane have also hit the roof, due primarily to congestion at the Panama Canal.

Gulf Coast Overseas Propane Exports

Figure 2. Gulf Coast Overseas Propane Exports; Source: RBN NGL Voyager

Problems in Panama

Transit delays at the Panama Canal have been worsening for months and have recently been getting bad enough to make the headlines, particularly for the Neopanamax locks — the new canal expansion completed in June 2016 to accommodate larger ships. And it’s not just propane-carrying Very Large Gas Carriers (VLGCs) that have been having problems. In addition to VLGCs, the heaviest Neopanamax users are container ships and liquified natural gas carriers (LNGCs) — demand for transits through the Neopanamax locks has been running high in all categories.

Last month, in Bottleneck Blues, we considered the impact of Panama Canal congestion on LNG transport, resulting in delays of a week or more for canal transits. This has forced many LNGCs destined for Asia to go the long way around via Africa’s Cape of Good Hope. Of course, that doesn’t speed things up. It takes at least 10-12 days longer going by the Cape, but at least the ship avoids canal tolls and the total voyage time is not much longer.

Problems at the canal are being blamed on a myriad of factors. Like everything else, COVID has slowed things down, impacting tugboat staffing and other operational issues. Also, the canal fell behind when shipments delayed by last year’s Gulf Coast hurricanes all started arriving at the same time. On top of that, there have been problems with fog, low water levels in Gatun Lake (see Here She Comes, Full Blast And Top Down), and as we said earlier, overall high demand by all three types of vessels (container ships, LNGCs, and VLGCs) that depend on Neopanamax locks.

Worse for LPG Vessels

As bad as the canal problems have been for LNG vessels, it has been worse for the LPG ships - those moving both propane and butane, but mostly propane. For one thing, the LPG trade between the U.S. and Asia described above is very dependent on the canal. Back before the Neopanamax locks opened four and a half years ago, less than 10% of the world’s 400-ship fleet of LPG carriers could use the canal — they were simply too large, having been designed mostly to move LPG from the Middle East and North Africa to Asia. But as LPG exports from the U.S. Gulf Coast ramped up before the canal expansion was finished, shippers made do with a cumbersome STS (ship-to-ship) transfer system under which smaller Panamax LPG carriers would load in Houston, pass through the canal, and then transfer their cargo to larger VLGCs on the Pacific side of Panama before proceeding to Asia. This quickly came to an end with the new locks.

Now, as shown in Figure 3, with U.S. exports soaring and 60% headed to Asia, LPG vessels have become the second-largest user of the Neopanamax locks. In the Panama Canal Authority’s 2020 fiscal year ended October, 25% of transits — 808 in total (blue-and-white striped bar) — were VLGCs carrying mostly propane. Only container ships had more transits, with 1,404, or 43% of the total; LNG transits represented only 12%. 

Number of Panama Canal Transits by Vessel Type

Figure 3. Number of Panama Canal Transits by Vessel Type. Source: Panama Canal Authority

With this many transits, canal delays are obviously a very big deal for LPG shippers — every day spent waiting in line to pass through the canal is costly and eats into potential profits. As of last week, LPG vessels were waiting up to two weeks to transit the canal in the southbound direction (Atlantic to Pacific). Last week that stacked up 10 ships that were parked just outside the mouth of the canal on the Atlantic side with another four or five on the Pacific side (coming back from Asia to pick up a new load). The good news is that the situation has improved significantly in recent days, with several VLCGs making the southbound transit this week. While there are still ships waiting for clearance, it is just slightly more than usual. We’ll be watching carefully to see if problems flare back up. 

Rules Changed for LPG Carriers

On top of the delays that have been impacting all Neopanamax shipping, LPG carriers now have a new concern. At the end of last year, the Panama Canal Authority gave notice that it was changing the rules for ships to schedule transit slots in their reservation system. That system gives operators the ability to schedule transits up to a year in advance. The system carves up the scheduling timeframe into Booking Periods. For example, Booking Period 1 provides a scheduling window from 81 to 365 days before transit while Booking Period 2 is four to 21 days prior. The earlier a ship can make a reservation, the more likely it is that the ship will avoid a lengthy transit delay.

The new rules, which took effect on January 4, restrict Booking Period 1 for Neopanamax vessels to container and passenger vessels only. Very few passenger vessels go through the Neopanamax locks, so basically container vessels get preference. And on top of that, Booking Period 1a, 22 to 80 days out, is available for container ships, passenger vessels, and LNG vessels — LPG carriers have been shuffled off to Booking Period 2, effectively putting LPG at the back of the line for scheduling transits. At this point it’s an open question as to how much this might make things even worse for LPG vessels in the coming months as the effect of the new rules begin to be felt.

VLGC Rates Surge

Even though it looks like the immediate canal problems are easing, the fallout from transit delays and some VLGCs taking the Cape of Good Hope route over the past couple of months has wreaked havoc on the shipping market. Or if you are a shipowner, it’s bestowed one of the best markets seen in years. Back in June 2020, you could charter a VLGC for less than $25,000/day — dirt-cheap rates equating to less than $50/MT (about 10 c/gal) from Houston to Asia. Now, that same ship will run you more like $110,000/day, or $180/MT (about 35 c/gal). Ironically, such high shipping costs, along with fewer ships available for charter, probably have kept still more propane from being exported, and put a damper on propane price increases. In other words, propane prices could be higher if Panama Canal delays had not happened.

Which brings us to what is likely to happen next. Are shipping rates likely to stay strong and Mont Belvieu prices high? As always with the propane market, a lot depends on the weather. But propane is also a slave to the calendar, and therein lies what likely will be the next turn in this market. It may not feel it outside, but spring is just around the corner, especially for propane exporters. If you schedule a VLGC to load on the Gulf Coast in February, it’s going to be March before the ship gets to Asia — or even into April, depending on the loading date and any potential delays.      

Check out what that means in Figure 4. The blue line is propane’s historical price in Asia for the past two years, showing the astronomical price increase that Asia propane has experienced since April, up to $675/MT, or about 130 c/gal as of yesterday. The forward curve for Asia propane (red line) is steeply backwardated, however. By March the forward price is lower by 18 c/gal, and by April, another 10 c/gal. Which means loading a cargo in February and not getting it to market until April could be a very expensive proposition.

Far East Propane Price and Forward Curve

Figure 4. Far East Propane Price and Forward Curve. Source: ICE

In the next episode of this series, we’ll examine the implications of this shift in pricing, how the high rate of exports has been impacting the U.S. market, and what may be next for propane exports.

"Pink Shoelaces" was written by Mickie Grant and was released as a single by Dodie Stevens in February 1959 on the Crystalette label distributed by Dot Records. It went to #3 on the Billboard Hot 100 Singles chart and sold more than a million copies. The single has been certified Gold by the Recording Industry Association of America. The novelty song is about a man who wears "tan shoes with pink shoelaces, a polka-dot vest, and a big Panama with a purple hatband." Stevens was only 12 years old when she recorded the song.

An album of the same name was also released by Dot Records in 1959. The Chordettes released a single of the song around the same time on the Cadence label. "Pink Shoelaces" also appears in the game Little Big Planet 3, and the television show The Marvelous Mrs. Maisel. Personnel on the record were: Dodie Stevens (lead vocals, recitations), Randy Van Horne (recitation), Randy Van Horne Singers (backing vocals), Bobby Hammack and his Orchestra (orchestrations), and Lee Allen (tenor sax solo). A side note of interest is that the Randy Van Horne Singers did the theme songs for Hanna-Barbera cartoons, including The Flintstones, Top Cat, The Jetsons, and Huckleberry Hound. 

Dodie Stevens (Geraldine Ann Pasquale) is an American pop and rock singer. She has released three albums and seven singles. Stevens has toured as a backup singer with such artists as Loretta Lynn, Mac Davis, and Boz Skaggs. Currently, she teaches singing and stage performance out of her studio in San Diego.