Summer Strength and Winter Weakness Flip LPG Market

(February 26, 2018) — S&P Global Platts writes that through the late summer and into the winter, global markets for LPG have repeatedly defied expectations about seasonal patterns for supply and demand, reversing the usual script by strengthening in summer and weakening in winter, just when prices are typically at their annual peak. Across Europe, the U.S., and Asia, those patterns have been fueled by low stocks and high prices in the U.S. during the summer months, followed by weak winter heating demand in key consumer markets and a closed arbitrage from Europe to the U.S. for gasoline, which undercut demand for butane as a blending component as temperatures dropped.

The consultancy adds that underlying these factors are signs of a longer-running shift in LPG markets as the explosion of U.S. shale energy has redrawn the supply map for propane and butane, while petrochemical buyers, who use the products as alternative feedstocks to naphtha, have increasingly set the floor for demand even during the winter months.

Both propane and butane prices are typically seasonal. For propane, winter heating demand around the world normally pushes up price levels during the colder months, whereas when temperatures rise and prices dip during the spring and into the summer the product becomes attractive as an alternative feedstock to naphtha for petrochemicals. Butane has typically followed a similar cycle. In the autumn, gasoline blending in Northwest Europe shifts to winter blends, which allow butane to be used as a component. Butane is too light to be used in blending during summer months, and in markets like West Africa, summer specification is used all year round.

In the summer, like propane, butane sinks to levels where it becomes competitive as an alternative feedstock. Over the past several years, those seasonal troughs and peaks have often been flattened or slightly rounded, with butane’s seasonal shifts coming slightly later over the last two years. But the change has been particularly notable recently. Rather than merely flattening or coming later in the year, the seasonal trends have often been totally reversed, with strength in the summer and weakness in the winter, driven by sparse product during the warmer months and sparse demand into the winter.

That soft demand was clear in the latest data released by the Joint Organizations Data Initiative. EU demand for LPG fell by nearly 15% September to November compared with the same three months the previous year. Stockpiles also rose during that period, according to the data. However, winter demand could still spike this year, notes S&P Global Platts, albeit late.

Driven by concerns about a cold winter and low stockpiles in the U.S. Gulf Coast, that market saw strength across late summer, resulting in a narrow or closed arbitrage to both Europe and Asia. That in turn resulted in waves of cargo cancelations—where buyers opt to cancel a cargo at significant cost rather than sell it in a comparably weak market—further restricting inbound supply. The impact was apparent in the Northwest Europe large cargo market. In the summer, the closed arbitrage from the U.S. to Europe narrowed the available incoming propane cargos largely to a handful of term cargos, leaving the region slightly tight despite weak summer demand. After beginning to rise in July 2017, propane pushed to a premium of $27.75 a metric ton to naphtha on Sept. 9, the highest premium since December 2013.

That summer strength was prompted by U.S. propane stocks that were dramatically below the same period the previous year, prompting concern that supplies would not be sufficient for domestic heating demand if North America were to face a cold winter. U.S. inventories fell as low as 38.5 MMbbl in April 2017, the lowest since the spring of 2014, the year of the polar vortex winter, which brought record-low temperatures to the U.S. and Canada, according to Energy Information Administration data. As a result, prices in the U.S. began to rise in preparation for winter heating demand in late June.

“Everyone got all bulled up on propane earlier than usual in 2017, or another way of saying it, markets had to price to product in the U.S. to stock up for winter,” a trading source said. “I think we would have run out if the market had not gotten very strong in early fall, end of summer,” he added. However, those fears of a run on winter product proved unfounded.

Prices began to fall, and front-month propane prices in the region dipped as low as 82.625 cents/gal. on Jan. 26 on anticipated production increases and smaller export volumes than expected. Meanwhile, in Europe prices also began to soften. In December, prices for costinsurance-freight (cif) Northwest Europe large cargos started sinking sharply versus naphtha. That differential, known as the “pro-nap,” indicates propane’s competitiveness against naphtha as a feedstock. By Jan. 26, physical propane cargos had dropped to a discount of $113.25 a metric ton versus the naphtha large-cargo price, the largest discount in nearly 19 months, or since July 2016.

Beginning in mid-July, prices on cif butane coasters began to rise swiftly against naphtha, lifted by short supply in Northwest Europe and demand from petrochemical buyers, who were choosing butane over propane due to high prices for the latter amid tightened local supply, and owing to the shutdown of the butane terminal in Grangemouth, Scotland, which was out of commission from August to mid-November for upgrades. By Sept. 14, butane cif coasters had hit 101% relative to naphtha, their highest level since Jan. 9, 2014 and the first time since then that butane had risen past parity to naphtha.

But by January, butane prices across the Northwest European complex had sunk to their lowest levels relative to naphtha in about six months, bringing prices level with typical mid-summer rates for both 2017 and 2016. This year, a closed arbitrage from Europe to the U.S. for gasoline has left that market floundering, and butane has struggled to attract buying interest. As a result, petrochemical buyers have been providing a floor for prices. But those buyers can be more strategic about when they buy, and are frequently well covered due to ample naphtha and propane in Northwest Europe.

The return of the Grangemouth terminal also helped lengthen the market in Northwest Europe. The length on butane worldwide has also been prompted by soft winter heating demand in Asia, where butane sunk to levels in December where it attracted petrochemical buying through the winter, according to market sources at the time.

Following an upside-down six months, propane and butane could still be facing a late-winter spike, some sources say. In early February LPG markets worldwide strengthened sharply. That was driven largely by interest from petrochemical players as sinking prices encouraged switching from naphtha to LPG. But sources say expectations of cooler temperatures, coinciding in Europe with a series of refinery outages, could also offer the rush on product that sellers have been waiting for.

However, even if the rush does come, the scale of the winter spike is unlikely to match previous years. That could spur another unusual summer in 2018. With prices already unusually low going into the spring season, there may not be much room for them to budge further, leaving supply ample and petrochemicals in the demand driver’s seat for the next six months.

(SOURCE: The Weekly Propane Newsletter, February 26, 2018, published twice weekly by Butane-Propane News)