Winter winds

Published at 09:26 6 Oct 2017 by

Mont Belvieu propane prices smashed through the heady level of 70% of WTI last month as Hurricane Harvey rattled a market already stretched thin by low inventories. The storm put a halt to USGC exports for a week, but shipments subsequently rebounded sharply, with weekly EIA data showing exports rising towards 1 mb/d over much of September as a backlog of cargoes was loaded for export. This wiped out the brief recovery in USGC propane/propylene stocks and left inventories just 0.8 mb higher at the end of September than they were on 25 August. Asian markets are facing tight inventories heading into winter, the respite for the USGC may be limited.

US independent oil and gas producers were quick to blame Harvey for weak production, but there is more to the shortfall than the storm. Many producers have struggled to secure the fracking crews and equipment needed to sustain the growth levels that had been expected. EIA data for July show that US gas plant propane output rose by just 35 thousand b/d y/y over the first seven months of 2017, of which 15 thousand b/d came from the Permian. Production will undoubtedly rise into year-end, but challenges to lifting output will likely persist into 2018, as investors rebel against the sector’s profligacy.

Our latest US natural gas plant propane production forecast puts supply in December at 1.28 mb/d, a y/y increase of 0.15 mb/d, but still below our optimistic case that had propane output reaching 1.33 mb/d by December. Despite production growing by less than many had anticipated, exports out of the US have not adjusted lower. Since shipping restrictions along the US Gulf Coast were lifted as Harvey’s effects subsided, US LPG exports have surged, perhaps by more than preliminary EIA data suggest.

High exports were the cause of the early start of seasonal propane stockdraws in the US last month and if US propane exports average 1 mb/d through January, inventories would plummet to just over 39 mb. Even if exports average 0.8 mb/d between October and January, inventories are set to fall to below 64 mb in January (-10.8 mb y/y), and achieving this low level of exports will require shipments to overseas markets to fall y/y—a tall order during the winter.

JODI data show Indian LPG stocks were at a 10-month low of 6 mb in July, down y/y by 1.3 mb. Japanese and South Korean inventories were 1.8 mb lower y/y at the end of August. Imports have likely remained low through Q3 17, putting further pressure on buyers in Q4 17 and Q1 18 to ensure adequate winter supply. Asian demand is just beginning to ramp up for the heating season, and shortfalls in Middle Eastern LPG exports due to field maintenance and unplanned outages (particularly in Iran) will keep the pressure on US prices.

Gross gas production in the Delaware and Midland basins has grown significantly, and even with drilling set to be a lot lower on our model than the broader market consensus, we still expect a significant rise in gross natural gas production in the Permian. Legacy well declines have masked much of the increase in gas output from newer wells in the Permian, but the growth in this “new” gas output will become more prominent into 2018. The winter of 2017-18 may well be very tight, but from the spring of 2018 onwards, the market is likely to be more balanced once stocks have rebuilt.

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