LPG prices have been unseasonably strong over the last month, posting gains against crude and naphtha as the whole energy complex has rallied amid fears that the resumption of US sanctions on importers of Iranian oil will trigger a shortfall in the global oil market. While steady US exports have been absorbed by global markets, LPG prices should weaken in the near term as refineries are exiting maintenance and demand slows seasonally in Asia. Over the medium term, forces that could push prices higher again are at play. Infrastructure constraints in the US could crimp growth and the renewed US sanctions on Iran will only really start to bite later in the year.
US exports averaged over 0.8 mb/d last month, some 80 thousand b/d higher y/y. Direct shipments to China slumped, but Central America and the Caribbean, South America and Europe have absorbed these barrels. Latin American LPG import demand has grown as falling refinery runs have dragged down production. In Europe, LPG imports have risen strongly y/y, spurred higher by low stocks and heavy spring refinery maintenance.
Over January-April, Asia has imported nearly 1.7 Mt more LPG y/y, and this robust strength came despite infrastructure bottlenecks in India and an erratic performance from China. Attractive cracking economics also supported imports in April, though demand cooled last month in Japan and South Korea thanks to resurgent stocks. Chinese buying in May has picked up m/m but shows a massive drop of 0.45 Mt y/y to 1.68 Mt, albeit off a record base, while June imports will remain pressured by environmental restrictions. With import needs coming off in several countries, this slowdown could quickly translate into unsold cargoes floating off Asian ports.
Meanwhile, prompt supplies continue to be high. Egyptian natural gas output has jumped and LPG exports hit a record 0.14 Mt in May. In the short run, these extra barrels are perhaps going to be tricky to absorb, but with Iranian LPG exports threatened by US sanctions, the market may soon need supplies. Asia’s Q4 18 import demand is set to grow by 0.4 m/d y/y, led by China and India. By then, US sanctions, which appear more broad-based than before, may have forced oil and condensate production curtailments in Iran that would also reduce associated LPG output.
At the same time, production growth limitations are being felt in the US. The discount for propane at the inland market hub of Conway, Kansas blew out last month amid worsening congestion on pipelines for carrying unfractionated NGLs from Midcon to the USGC. Similar issues are cropping up in the Permian, with applications to prolong gas flaring due to a lack of infrastructure reportedly reaching record levels. Crude shippers are eyeing NGL infrastructure as a potential option for constrained crude oil shipment capacity. Permian oil transportation constraints appear so severe that either NGL growth will be threatened by a drilling slowdown due to a lack of takeaway, or it will have to face gas and y-grade takeaway constraints.
These supply constraints will increasingly make themselves felt heading into 2019, when global demand growth is expected to remain solid. OPEC spare capacity is set to fall below 1.5% of global oil demand by end-2018, leaving little scope for higher output. If US sanctions constrain Iranian supply growth just as infrastructure challenges slow US output growth next year, LPG prices will have to get onto the same trajectory as crude.