LPG markets have turned a corner following a slowdown in demand and with US production returning to growth. Mont Belvieu propane has offered the best returns amongst the main refined products over the past year, outperforming both gasoline and diesel. Propane’s strength has been the result of falling US production, higher domestic demand, and relentless demand growth in Asia that supported US exports of more than 1 mb/d in December and January, which rapidly depleted US stocks. Nevertheless, the market now looks more balanced than it did a couple of months ago.
As producers ramp up activity in the Permian basin, US LPG production is rising y/y once again. Given the strong showing US crude and NGLs production made in February, we have raised our US LPG production growth forecast for 2017 by 20 thousand b/d to just under 0.1 mb/d. With Canadian LPG output likely to rise by 60 thousand b/d y/y as local producers target condensate barrels for diluent ahead of new bitumen projects starting up next year, North American supply growth should come in around 0.16 mb/d y/y this year.
While this level of production growth is still insufficient to feed export terminals at a rate of 1 mb/d while rebuilding US stocks to comfortable levels, these incremental volumes will provide some breathing room for the market and limit the upside for prices during the summer months. A decent volume of propane will likely to go into storage rather than being exported abroad in May, with as many as ten US cargoes loading in May likely to be cancelled. Should net propane exports come in around 0.80 mb/d in April, and around 0.60 mb/d in May, US stocks should build by more than 10 mb this month, which would go a long way towards easing market anxiety.
Worldwide, feedstock switching away from LPG to naphtha over Q1 17 has also helped balance the market—in particular, Asian LPG demand grew at the slowest pace since January 2016, rising by 0.18 mb/d y/y to 4.1 mb/d. The sudden slowdown has worried traders who have grown accustomed to y/y demand growth in Asia of at least 0.4 mb/d, particularly after an exceptional Q4 16, when y/y expansion averaged 0.6 mb/d—the highest growth in a single quarter on our records.
But we believe the Q1 17 slowdown was due to one-off factors and do not envisage a scenario like last summer when there was a surge in floating storage off Asia. The risk here is that Asian demand recovers, leading to a quick rebound in exports later in the summer.
Indeed, Chinese demand appears to be picking up again, as PDH plants return from maintenance. The propane-butane mix at Chinese terminals in the north (Ningbo) is trading at the highest premiums to the propane AFEI since Q1 16, even as butane’s premium in Asia has retreated significantly. More broadly, manufacturing PMIs are surging worldwide—and with leading economies in expansionary territory for over a year, it seems like the March slowdown was temporary, with heavy refinery and cracker maintenance also playing a role. So, while falling cash premiums for prompt cargoes in Asia suggest that the urgency has eased, the market is far from the doldrums it was in last August.