The US natural gas liquids system is constrained, making the production and distribution of NGLs harder as stocks build in unhelpful places even as demand from export markets continues to pull supply out of the US Gulf Coast. US propane stocks rose by 5 mb m/m in July, but just 0.9 mb of this was on the USGC, thanks to strong exports and slowing production growth. With Asian LPG import demand growth poised to accelerate to over 0.1 mb/d y/y, the Mont Belvieu market could see some excitement as Q4 18 moves closer.
The divergent paths of PADD 2 and PADD 3 propane stocks strongly suggest infrastructure constraints are preventing inland NGLs from flowing to the USGC. Even though flows between PADD 2 and PADD 3 rose each month over January–May, surging PADD 3 ethane demand has forced the USGC to take more supply from other regions, filling up pipes, a trend we expect to stay strong for a while. A similar pattern shows up in butane, with exports estimated at 0.15 mb/d in July, nearly triple year-ago levels.
Before Asian restocking demand picks up, there could be another month or so of market pain due to heavy resupplies from the US coinciding with an uptick in Middle Eastern spot cargo availability. But with winter looming and low LPG stocks in Japan and Korea, a pre-winter restocking bid is likely. Propane cracking expansions in Korea and new alkylation and PDH units in China will all contribute to Asian import demand rising by up to 0.15 mb/d y/y in Q4 18. Middle Eastern exports will rise by at most 0.11 mb/d y/y, with downside risks being higher Saudi exports not materialising until Q4 18. Either way, Asia will need to pull incremental US barrels, setting up a bullish scenario for Mont Belvieu prices.
The outlook for Asian naphtha over Q4 18 is strong as US sanctions on Iran have already increased competition for naphtha ahead of the winter cracking season. Lower Iranian naphtha exports, maintenance at Russia’s Tuapse refinery from early October and limited additional supplies from the Middle East means naphtha markets are likely to be even stronger in Q4 18, which will keep LPG competitive as a petrochemical feedstock.
In Europe, markets are waiting on developments in the Mariner East saga. As a quick fix, Sunoco Pipeline is looking to use an existing refined products line to move more Appalachian NGLs to Marcus Hook, which would enable Europe to secure more Northeast US supply and leave it less vulnerable to constraints at Mont Belvieu. A strong Asian naphtha complex and hefty PADD 1 and PADD 2 refinery TARs will support European naphtha prices, bolstering LPG’s competitiveness as a feedstock, with butane likely to be more competitive than propane given Europe is much less reliant on the US for it.
As we move into trading for Q4 18, demand is growing strongly, but USGC resupply is being hampered by problems with localised stockbuilds and pipeline constraints. With Asian import demand growth, the east will still need to pull from the west, pointing to higher prices, but naphtha looks stronger and should keep a lid on propane-naphtha spreads over Q4 18. But LPG markets are close to tipping point, so below-average winter temperatures would set up an interesting end to an unpredictable year.