Propane markets are entering the stockbuild season with US propane swaps more steeply backwardated than they were last year, when the market was far more preoccupied with the tightening supply situation. But it is far from clear that shorting this market will yield a quick win. Backwardated swaps mean there is no incentive to store product, so exports will continue, perhaps until floating storage occurs in Asia. Right now, there is no sign of that happening soon, with only one VLGC having sailed from the USGC around the Cape to Singapore in recent weeks. Europe is still absorbing more supply than last year, while incremental demand gains in the US, such as a new PDH plant in Texas, are also slowing inventory builds.
Until the waterborne market gets oversupplied, US exports will probably stay high and while stocks will grow, they will not become unmanageable for a while. The trajectory of fundamentals in both LPG and naphtha points towards lower prices and balances are softening. US propane inventories rose in the week ending 27 April to reach 36.4 mb, but this still left stocks lower y/y by more than 2 mb when compared with data for April 2017. Petrochemical demand rose as Enterprise Products Partners’ PDH plant in Mont Belvieu started up in Q1 18 and the strength in backwardation combined with high cancellation fees are encouraging exporters to lift cargoes even when economics are marginal.
The backwardation in the swaps markets is partly due to the geopolitical risks now percolating through the oil market, arguably affecting LPG markets as well. Not only is the US likely to re-impose some sanctions on Iran if Trump pulls out of the nuclear deal as expected on 12 May, but trade tensions with China have not disappeared yet. In addition, Iran surprised Asian petrochemical producers in March with a 25% reduction in Q2 18 condensate term export volumes. While there are several plausible explanations for this, Asian naphtha markets have wasted little time in seeking to sew up alternative supply, and Asian naphtha timespreads are steeply backwardated.
Supply is on the rise and cracker demand is going to ease with turnarounds in Asia. Crackers will be maximising LPG and ethane where possible, but tightening ARA supplies and concerns over a lack of US LPG arriving later this month have lifted propane prices. Yet, propane is still only pricing at around 82% of naphtha, a step or two below the 90% threshold at which ethylene producers will contemplate switching feedstock. Naphtha is expensive too, with Northwest European naphtha now pricing some 6% higher y/y at almost 90% of Eurobob.
Over the next month, the Iran and China uncertainties are the key challenges. So while US supplies are growing, the structure of the market will continue to encourage high levels of exports, both due to backwardation in the swaps but also the high cancellation fees at export terminals that encourage shippers to find ways to mitigate losses rather than cancel cargoes outright. Until the waterborne market gets oversupplied, US exports will probably stay high. LPG and naphtha fundamentals point towards lower prices, but while balances are softening, trading this development will not be easy.