Atlantic basin LPG demand has been rationalised to the point that even without cold weather, Asian buyers have recovered a lot of pricing power, pushing back on purchases for the moment, temporarily tipping the market into contango. Asian demand growth has been met this year entirely through US LPG exports being redirected from Europe to Asia, so once European heating requirements pick up, competition in international markets will recover.
Midwest LPG pricing has been at an unusual discount to US Gulf Coast values, but this may be changing. North Dakota waived some LPG trucking rules to boost supply this month. The corn harvest has been slow this year, with only a little more than half the crop harvested at the end of October though with corn prices at relatively low levels, farmers may be cautious before investing in crop-drying until forced to do so by the weather.
European LPG demand has fallen y/y every month since January as petrochemical producers have curbed consumption amid soaring prices. Imports have been low as a result, with ship tracking showing cargoes into Europe weak for much of this year. The bulk of the decline in imports has come from US-origin cargoes. If demand in Europe picks up, we expect European buyers to seek barrels from the USGC, especially as the Mariner East 2 pipeline looks to be delayed into 2018, thus limiting outflows from the US East Coast.
Asia entered the fall with inventories in deficit, but ship tracking suggests strong imports in October and November which likely eliminated much of the shortfall in Japan and South Korea. Japan’s stockpiling agency completed its strategic LPG inventory purchases this month, while planned maintenance at a South Korean PDH unit will curb demand towards year-end. The Asian market will need to see an uptick in demand from India and China to sustain growth rates.
Middle Eastern exports are already going to be lower y/y due to OPEC-induced cuts in crude oil output and maintenance. Additionally, not only are Iranian LPG export volumes still low due to problems at the South Pars field, but the UAE is set to cut exports as it starts a PDH plant in December. Although the plant was designed to run at least partially on LPG produced by the Ruwais refinery, it is likely to rely exclusively on LPG from the country’s gas fields over the next year or so due to damage to the refinery that will not be fixed until at least Q1 19.
Consumption between December and February in Asia has been up to 0.2 mb/d higher than the preceding three months, and with China facing natural gas shortages as the government has consigned tens of thousands of coal-fired boilers to the scrapheap in a bid to improve air quality, LPG should get a boost from residential demand.
The market is in a soft patch of sorts, but we do not see this as long-lived. Once heating demand increases, the balance that has been achieved by starving Europe of supplies looks less easy to maintain. International LPG prices are strong at near parity with naphtha, but they have been stronger in the past. The relative value of US propane to WTI looks like uncharted territory, but this is more a function of how much better linked the USGC is to the international market. With little chance that supply will rise soon, prices will have to rise further once winter comes.