U.S. LPG Exports Seen Poised for More Growth

(January 14, 2020) — Argus Media reports that the U.S. propane arbitrage at Mont Belvieu, relative to delivered prices in Asia on the Far East Index (FEI), widened to $200 a metric ton (MT) on paper by the end of 2019. Strong U.S. production kept prices in the U.S. low. The steep decline for U.S. propane decoupled it from delivered prices in Asia in early December. Using spot freight, that initially left the calculated cost of U.S. product delivered into the region $35/MT below delivered prices on the FEI.

The wide arbitrage on paper further incentivizes strong export demand from the U.S., Argus comments. January-loading cargos on a spot, free onboard basis out of the Gulf Coast were discussed in double digits by mid-December. A Jan. 8-9 spot cargo was sold at more than 11 cents/gal. the week of Dec. 6, with buying interest heard as high as 18 cents/gal. the following week as the physical FEI hit $593/MT Dec. 20, the highest level seen since Oct. 22, 2018.

Shippers are working to take advantage of the wider Asia arbitrage while it lasts, keeping the very large gas carrier fleet well utilized on a Houston-Chiba (Japan) basis. Two days’ worth of fog-related delays out of Houston at the end of November, coupled with four-day transits along the congested Panama Canal, is keeping vessel availability reasonably tight.

In November, Enterprise Products opened its 175,000-bbld LPG export expansion on the Houston Ship Channel. In early December, Energy Information Administration (EIA) data showed U.S. propane and propylene exports hit an all-time high of 1.5 MMbbld, the highest level since December 2016, immediately following commissioning of the expanded capacity. Additional expansions to loading capacity are expected to come online by the third quarter of this year.

Primary U.S. propane inventories fell 2.5 MMbbl to 91 MMbbl the week ended Dec. 13, according to EIA, but remained 24% above year-ago levels. Higher U.S. propane production, estimated by the agency at 1.66 MMbbld in September 2019, pushed LST propane prices at Mont Belvieu lower—to 36% of the value of NYMEX West Texas Intermediate crude oil in the first half of December. LST, at 52.25 cents/gal., was down from 71.25 cents/gal. year over year.

Moving forward, U.S. propane prices are poised to fall further based on the backwardation during the first quarter shown for FEI paper. In mid-December, the FEI curve showed the February-April period at a $43/MT backwardation. Based on the Asia curve, Mont Belvieu propane would need to fall even more in order for production to clear the over-supplied U.S. market. In the meantime, spot freight costs out of the U.S. have room to run higher, at least in the short term, as the wide arbitrage to Asia allows for higher shipping costs.

(SOURCE: The Weekly Propane Newsletter, January 13, 2020. Click here to receive a trial subscription.)