Slim stocks

Published at 09:38 4 Aug 2017 by . Last edited 13:46 14 Aug 2017.

Propane exports have regained strength in July, raising the possibility of an even tighter propane market than expected through H2 17. Exports rose m/m by 0.17 mb/d to 0.8 mb/d last month, and could be bolstered further throughout Q3 17 and into Q4 17 if seasonal buying increases. Pushing ahead into 2018, tightness in the propane market will likely be caused by the pull from Asian demand, rather than a deficit in US production as NGLs output growth is accelerating.

Permian production is visibly beginning to pick up. A common trend observed among players in the basin is that gas-to-oil (GOR) ratios have been higher than expected. Higher output will help to balance US propane markets afloat, though potentially lower Middle Eastern supply and exports from September, coupled with stronger-than-expected Asian demand, mean there is still upside risk to US exports and pricing. In December 2017 we expect US crude output to be 0.85 mb/d higher y/y, with the Permian delivering the lion’s share of US output gains. US gas plant propane production will increase to 1.28 mb/d by year’s end, higher y/y by 0.16 mb/d.

European naphtha demand has been logging impressive growth all year, driven by robust petrochemical margins and some switching away from LPG by steam crackers. For example, European LPG demand was down by 43 thousand b/d y/y at 1.12 mb/d in May while at the same time naphtha demand was almost 10% higher at 1.24 mb/d. Asian naphtha demand has been similarly strong, growing by 0.24 mb/d y/y to hit 4.19 mb/d in May. Moreover, this demand surge has not been matched by refinery output in either region, while FSU exports have also been stagnant.

Floating storage off India has been mopped up and Chinese demand is going from strength to strength with yet more petrochemical start-ups looming. The naphtha market has sprung to life, with swaps in both Asia and Europe flipping into backwardation. Naphtha demand has raced higher this year in both regions, partly due to LPG being backed out of flexible crackers but also due to strong plastics demand. Stronger naphtha is raising the floor for LPG in what are usually the slowest months of the year.

We believe that the US can only export 0.8 mb/d of propane over H2 17, essentially flat y/y, if it is to end the year with inventories near December 2016 levels, on a days of supply basis (adjusted for exports). However, even under this scenario stocks would be low at just 37 days of supply, compared to 40 days of supply in December 2016 and 51 days of supply in December 2015. With a high chance that Asian import demand will strengthen in the coming months, there are likely to be times when US exports come in above this level and force prices to constrain exports once again.

Chinese apparent demand for polyethylene has been impressive this year, with net imports rising by 19% y/y to 4.7 Mt over the first five months of 2017, a phenomenon many in the plastics trade believe is connected to the country’s rapidly growing internet retail market. As such, the spread between basic petrochemicals and naphtha is well worth watching. While naphtha is strong, propane can only weaken so much, even as US production growth accelerates.

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