Falling Middle Eastern exports, uncertainty over US sanctions on Iran and the threat of Chinese tariffs on US LPG has kept the Asian LPG market unusually strong over the last month as importers sought to replenish stocks early rather than await further clarification. The recent OPEC+ agreement to raise production means Middle Eastern LPG supply is going to rise from its recent lows even if Iranian exports come off a bit and the spike in Asian prices will ensure strong propane exports from the US this month, so the international markets should be well-supplied and Asian LPG prices should come off in Q3 18. Into Q4 18, as Iranian production cuts start to make themselves felt and the risk of US infrastructure constraints increases, the risk of upside surprises to price should return alongside seasonally stronger demand.
June Middle Eastern LPG exports fell by over 0.6 Mt m/m and are likely to be constrained in July too given maintenance in Qatar and Iran. But these are short-term worries, as output growth in Saudi Arabia, Kuwait and UAE will add an extra 59 thousand b/d of LPG in H2 18 vs H1 18 against last month’s balance. The US expects buyers of Iranian crude to cut their imports to zero by 4 November and there are plenty of signs that buyers are taking heed. This has led us to lower our Iranian LPG production forecast by 35 thousand b/d over H2 18. China and India have both lowered Iranian LPG imports in June, likely increasing competition for Middle Eastern cargoes. Propane’s strength in Asia should continue in the near term amid continued competition for prompt barrels before Saudi exports rise.
Asian demand was mixed in H1 18 and Chinese import requirements will probably remain fickle, with the pollution crackdown continuing and trade tensions with the US mounting, even though Chinese buyers were likely anxious to secure non-US supplies ahead of proposed tariffs. But Chinese butane import requirements should grow following the start-up of new alkylation units. Indian demand should soften in anticipation of weak demand during the monsoon season and robust domestic output, while high Korean stocks and lower mandatory stock levels in Japan will stem import demand. Propane-naphtha spreads have narrowed to under $60 per tonne in Asia—around 90% of naphtha prices, the approximate switching point for flexible crackers. But we think a switch to naphtha is unlikely. Naphtha should strengthen from here as prices in both Europe look to have found a floor and the deluge of US LPG exports due to arrive in Asia from August will weigh on Asian LPG prices.
US infrastructure constraints could support pricing at Mont Belvieu if they limit production and/or fractionation amid continued export strength. The basins most vulnerable to constraints are the Permian, Midcon, Bakken, and the DJ—where fractionation capacity in the DJ will tighten considerably by Q4 18, while the Permian is already facing oil and gas takeaway issues.
The market is heading into oversupply with US exports looking heavy and Saudi Arabian exports set to rise. But into Q4 18, constrained US production, declines in Iran and the threat of China’s LPG tariffs sets the stage for the market to surprise to the upside. The wildcard in this market is Saudi Arabia, as there is still some uncertainty as to how production increases will translate into higher LPG exports.