A burst of cold weather in the US and Asia has helped perk up propane prices since mid-December, and with Asian inventories being run down, buying to replenish stocks is likely to emerge in the coming weeks. Trading activity has been limited to opportunistic buying of butane as petrochemical plants capitalised on weaker prices amid a heavily bid naphtha market.
The restart of coal-fired plants in China to ease winter power shortages has probably capped residential heating demand growth for LPG in the near term, demand from the petrochemical sector is set to rebound with new PDH and alkylation unit start-ups due in 2018. We expect higher total Chinese LPG demand growth (+0.18-0.20 mb/d y/y, +10.6%) in 2018. Furthermore, natural gas shortages have supported recent LPG demand—rising methanol prices on higher natural gas prices have curbed methanol-to-propylene (MTP) and MTBE production, boosting PDH operating rates and production of butane-derived gasoline blendstocks such as alkylate.
While no new PDH plants started up in China last year, both the 0.66 Mtpy Fujian Meide plant and Zhejiang Satellite’s 0.45 Mtpy expansion are expected to start up in H2 18. In the US, Enterprise’s 0.75 Mpta PDH plant will add about 27 thousand b/d of demand by the end of Q1 18. The UAE is also set to commission a 0.5 Mtpa PDH unit as a part of its Carbon Black Ruwais 2 project from Q2 18 (with mechanical completion set for Q1 18), which will require around 18 thousand b/d of propane once fully operational.
LPG is also poised to claw back some market share in 2018 given strong naphtha values, although naphtha was the preferred the cracker feedstock in 2017. Middle Eastern output will be markedly lower in Q1 18 amid hefty refinery maintenance, while the start-up of Petro Rabigh’s PX and benzene plants in March will further exacerbate the Middle Eastern naphtha crunch. New Chinese reformers and petrochemical capacity will require additional naphtha imports, likely leading to higher prices. Incremental supply from Europe may be limited as gasoline blending demand is expected to remain strong, higher y/y by 6.5% in Q1 18.
There are plenty of positives in store for demand in 2018, but a key difference to 2017 will be in the realm of supplies. In October 2017, US NGLs production surged by 0.42 mb/d y/y, far exceeding our expectations and those of the market. According to lagged well-level data, gross gas output from the Permian basin’s Midland and Delaware shale plays breached 8.0 bcf/d in September, approximately 20% higher y/y. We now estimate gross gas production from these two plays may rise by 30% y/y by September 2018. US gas plant propane output should grow by about 0.14 mb/d between October 2017 and October 2018.
But it is not just the US where supplies are expected to rise. Given a dismal performance across Q4 17, Middle Eastern NGLs production will also rise y/y in 2018, as over 0.60 mb/d of light crude and condensate projects start up in the region through H2 18. The final tranche of Australian LNG projects that also produce NGLs are due in 2018, too. So there should be plenty of supplies to feed robust demand, opening prices up for plenty of downside risks. Buyers anticipating a weaker LPG market are likely to hold off on purchases once winter demand has passed.