Time to build

Published at 09:27 7 Apr 2017 by

LPG forward curves have weakened as demand slows from the peak winter months, and most markets have moved into seasonal contango. We are still bullish on global LPG, however, because the dynamics of US production haven’t changed: supply growth will be limited through Q3 17. Incremental propane supply will have to come from associated gas production. The heavy withdrawals of propane from US storage should cease this month and attention will turn to inventory builds ahead of the next heating season. With US propane stocks at 41.6 mb at the end of March, some 60 mb (10 mb per month) would need to be injected over the next six months to reach what we assume to be the safe level of 100 mb. Until US exports come off meaningfully, these builds simply won’t materialise.

Curbing the appetite for US LPG supplies won’t be easy though. Asian LPG demand grew by 0.49 mb/d on average over the first two months of the year, and although this was a slowdown from the y/y growth of 0.68 mb/d over the last two months of 2016, it was almost double 0.25 mb/d y/y growth posted over the same period in 2016. Indian LPG demand growth, which is quite evenly split between butane and propane, will also continue to increase. After adding some 60 million new LPG consumers over the past three years, the government hopes to add another 67 million connections—half of them subsidised—by March 2019. Although rising oil prices will force the government to re-evaluate the cost of LPG subsidies, there appears to be little that will dent demand.

The petrochemical sector has had more success curbing LPG demand recently, especially in Europe, but it isn’t a forgone conclusion that this will continue. The Northwest European propane-naphtha spread has swung widely in recent weeks, ranging from -$37 per tonne in mid-March to more than -$100 per tonne at the start of April, but many European crackers are still favouring heavier feedstocks due to the persistent strength in petrochemical co-products. Butadiene prices in Northwest Europe have shed more than $800 per tonne since the end of February, but at $1,900 per tonne, they are still at a multi-year high. If co-product prices retreat further, however, it would be a bullish development for LPG as lighter feeds would come back into favour.

Our current expectation is that US propane supplies will grow by just 55 thousand b/d y/y, pushed higher by rising associated gas production from shale oil developments as well as growth in the isolated Northeast US. We are expecting US dry gas production to only increase y/y by only 0.5 bcf/d in 2017, but even if gas production jumped by 1.5 bcf/d, and all of it was Eagle Ford-type wet gas, propane output would increase by only 70 thousand b/d. Nevertheless, given the recent pace of activity in the Permian basin there is likely upside to this view towards the end of 2017.

In all likelihood, the market will continue watching inventory stats in the US, as the Mont Belvieu market now plays a critical role in determining global LPG prices. If propane exports remain elevated, stockbuilds won’t materialise, and the market will have to come to terms with the fact that the US will go into the 2017/2018 heating season short of product and banking on higher output in 2018. Mont Belvieu prices should remain strong relative to global indices as a result.

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