Trade Idea: Short the May/Jun C3 CP Spread

Onyx Research Analyst Finn Gordon’s trade idea this week is to short the May/Jun C3 CP spread. The May/June Saudi propane spread has already fallen $10/mt since the start of the month. With the expectation of lower CP settlement prices gaining momentum, the spread may have more to give before finding a floor.

At the start of this month, Saudi Aramco announced the settlement price for the April C3 CP contract at $615/mt. This was $15 lower than the March settle and below market expectations which suggested an unchanged value. This lower settle sent ripples throughout market sentiment. Looking back to last year, the April settle saw a notable decline of $165 to $555/mt – and this level was pressured lower to settle at $400 for August. After months of strengthening, has this lower settle ignited a chain reaction for lower prices across summer?

The prompt BLPG-1 freight rate remains in high $60/mt handles, which affects the profitability of the route from the AG to Japan. This disrupted arbitrage dynamics last month, with the time charter equivalent much higher out of the US. In turn, if freight sees an uptick to above the $70/mt mark, Saudi Aramco will have to potentially cut prices by a greater amount in order to keep competitive. This lower settle can also be compensated by higher crude prices, which remain above the $90/bbl mark.

Overall, participants will try to avoid being caught by the same surprise which they faced for April, and may look to get in front of a potential lower settle, narrowing the May/Jun spread further.