Hurricane Harvey appears to have done little major damage to key US Gulf Coast production and export infrastructure, but the delays to US exports caused by the storm have heightened supply concerns in international markets. If US propane exports average 1 mb/d in Q4 17, which would be just 60 thousand b/d higher y/y, stocks could get uncomfortably low by Q1 18, especially if US NGLs output growth disappoints even modestly. If so, sustaining this export level will likely be impossible.
Harvey caused US propane supply losses of up to 60 thousand b/d in August and up to 30 thousand b/d in September, which is modest compared to the six-day halt suffered by US LPG exports from terminals on the USGC. As of 6 September, a myriad of vessels, including 18 empty VLGCs capable of carrying more than 9 mb to global markets, were anchored and waiting to get into ports to load cargoes, delaying roughly 25% of the monthly exports that would normally come out of Texas. Based on their 1.1 mb/d nameplate capacity, the major USGC LPG terminals would have to run at 100% utilisation for nearly nine days to clear the backlog.
At the same time, Middle Eastern exports have dropped in tandem with lower crude output. Field maintenance and lower domestic natural gas demand will help push down Middle Eastern LPG exports from 1.43 mb/d in August to around 1 mb/d in September, a level last seen in January when the OPEC agreement came into force. Field work in the UAE over November and December will keep a lid on UAE exports in Q4 17 as well. The drop in Middle Eastern exports comes as Asian import requirements are set to rise seasonally ahead of winter.
Another hurricane could easily disrupt exports further, and Asian buyers will not risk losing supply. Asian LPG stocks were lower y/y by 3.9 mb by end-June, thus contributing to resupply needs. All of the 2 Mtpy of Chinese PDH capacity that was expected to come onstream this year has been delayed to at least end-2017, yet new MDH and alkylation plants are helping to sustain Chinese LPG demand growth. China’s anti-pollution drive will encourage greater LPG consumption this winter in residential heating as local leaders are to be held personally accountable for pollution levels, so any demand cuts from the petchem sector will likely be partially offset by higher heating demand.
Strong gasoline prices mean greater competition for gasoline blending components. The spread between FOB 95 RON European gasoline cargoes and naphtha cargoes widened from less than $90 per tonne to nearly $120 per tonne in early September. Yet with spot gross naphtha cracking margins for steam crackers vaulting up to $750 per tonne, competition for feedstock is intense. Even though naphtha is the preferred feedstock, LPG prices are being indirectly supported by the naphtha rally, which is raising the floor for propane and butane values.
Heavy US exports risk running up against production disappointment if preliminary Q3 17 supply growth estimates are accurate, adding upside risk to prices. Even if production growth recovers, we see US stocks hitting levels comparable to Q1 17 in Q1 18 in terms of days of supply (including exports), which will keep propane prices elevated. In all likelihood, this would make naphtha the preferred international petrochemical feedstock through the spring of 2018.