Balancing act

Published at 10:08 3 Mar 2017 by

The underlying data for the balances is now available to download as a part of this service.

Propane prices have weakened considerably from their multi-year highs over the past couple of weeks, but they still remain at around 50% of crude in the US, which is not a bad place to be after another dismal winter for North American heating demand and an early switch to naphtha cracking in the Atlantic basin. We still expect below-normal US propane stockbuilds in Q2 17, this after big stockdraws in Q1 17, due to record exports and falling gas plant production growth. As we move into H2 17, however, US supply and export dynamics will change radically.

In the short term, the US propane market is tight. Imports from Canada are higher, but if US propane exports remain at 1 mb/d, US stocks would be below the five-year minimum in September, based on our conservative supply and demand assumptions. Something has to give and in the short term, this can be exports. But for producers to add LPG supply, the whole NGL barrel needs to strengthen relative to crude and gas for an extended period. Until then, prices need to kill some discretionary demand and slow US exports.

We have previously suggested that LPG would be pushed out of crackers because of tight US balances increasing prices, but strong petrochemical prices for co-products including butadiene have arguably done a lot of the work already, pushing flexible crackers to start cracking naphtha instead of LPG. Indeed, choking off exports to allow US stocks to build is the start of the rebalancing process for LPG.

Moreover, steam cracker maintenance season is also underway in Europe, with three-quarters of the 3.0 Mtpy of capacity being taken offline primarily used for cracking LPG and other gases. So European LPG prices should remain under pressure in March and April, disincentivising exports from the US. Of course, heating demand will subside as well, and on a global basis, North America will account for three-quarters of the seasonal decline in LPG demand going into Q2 17. But that loss of demand is needed to rebuild stocks. To resolve the current imbalance, US prices need to rise, international prices need to fall, or a combination of both.

Butane swap curves have also sold off as the US switches to over-supplied summer-grade gasoline. This is after the $240 front-month backwardation in US butane at the start of February, when international prices rose sharply, partly due to fears of supply curtailments. But we remain quite constructive butane primarily due to strong demand growth in Asia, especially in countries like India and Indonesia, where mixed LPG containing 50% or more butane is predominant. Chinese demand to feed new mixed LPG dehydrogenation plants is also strengthening.

H2 17 looks different though. After significant delays, Sunoco Logistics finally received permits from the Pennsylvania Department of Environmental Protection in February to begin construction on its massive Mariner East 2 export pipeline. The 0.28 mb/d first phase of the project will transport ethane, propane and butane from the Marcellus and Utica to the VLGC-capable docks on the East Coast (Marcus Hook, PA). Once the ME2 line is completed (scheduled for Q4 17), we expect Northeastern gas producers to be primed to increase throughputs at under-utilised regional gas processing and fractionation facilities to allow them to quickly increase exports to Europe and beyond.

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