Bad blend

Published at 10:46 1 Dec 2017 by

Propane and butane have diverged as the market continues to anticipate good heating demand this winter, but petrochemical demand in China for butane has slowed significantly. China’s crackdown on air pollution has also worsened domestic gasoline blending margins as refiners have struggled to obtain sufficient export quotas.

Propane markets, however, continue to look to stronger demand in the coming weeks from rising heating requirements. US propane stocks drew by more than 5 mb over November, much more than the 1.86 mb draw in November 2016. While strong exports have undoubtedly contributed to the more rapid decline in US inventories this year, rural states faced substantially colder weather than a year ago in November. States in the western portions of the Midwest recorded sharply higher heating requirements, with heating degree days 236 higher in the four weekly readings in November than a year ago.

Chinese heating demand also appears strong. Chinese natural gas providers have already issued warnings of gas shortages this winter and are cutting supplies to industrial users to sustain supply for residential heating. Prices of LNG delivered into North East China reportedly rose by as much as 50% m/m in November and the surge in prices has also led to a spill over in demand for LPG, boosting delivered prices by about 10%.

Yet the cold has not been sufficiently severe or broad-based to overcome temporary slowdowns elsewhere in propane demand. In India, the gradual withdrawal of LPG subsidies is hurting refilling rates by lower income consumers, so while demand continues to grow as the number of connections expands, Indian marketers appear to have overbought in October once again. Imports hit a seven-month high of 0.46 mb/d that month and refiners face ullage issues again. Demand growth may be falling short of the more optimistic assumptions of some of the Indian importers, and any slowdown in refilling rates represents a material risk to demand forecasts.

Asia looks to be growing more cautious about being exposed to high LPG prices at the height of winter. Ship-tracking data suggest imports may fall m/m by 0.3 Mt or more in December for the big importers. When the Middle East dominated Asia LPG markets, importers were happy to stock up closer to peak demand, but the increased reliance on the US, which has a similar seasonal demand pattern to the Asian consumers, may be causing Asian end-users to restock earlier. This means an uptick in European buying is needed to keep the pressure on waterborne values. The buying will come and given that propane consumption by petrochemicals firms has already been cut a lot, any increase in demand will have to be met through higher imports.

At least in the near term, however, the weakness is going to resolve itself. Colder weather is on the way and Chinese gasoline blending should pick up in Q1 18, so both propane and butane should improve from here. Into 2018, however, US LPG output is poised to rise sharply. Gross gas output from the Midland and Delaware shale plays in the Permian reached nearly 7.8 bcf/d in June, more than 20% higher y/y, and gross gas output from these plays is on track to rise by a further 22% y/y by June 2018. With gas processing economics becoming more attractive, the risk is growing that US NGL production surprises to the upside.

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