The tightness in global LPG markets has been laid bare by price action this past month. LPG prices have outperformed crude as the y/y deficit in US Gulf Coast propane stocks has ballooned to 8.5 mb. Pipeline bottlenecks continue to bedevil shippers in the US, a situation that we think will persist well into 2019. This is a problem for the Asian market, which will need tonnes from the US this winter to balance. While the impending start-up of Mariner East 2 (ME2) could offer some relief by drawing off supplies currently stuck in the US Midcontinent, export arbs from the USGC to Asia are still wide open, suggesting heavy exports will persist.
Indeed, despite the worsening of the trade war between the US and China, flows of US LPG to Asia have been little affected. Chinese buyers have been able to manage without US tonnes, largely by swapping cargoes with other players in Asia and sourcing new supplies from further afield. As a result, imports of Middle Eastern LPG (notably supplies from Iran) to China have risen sharply. Meanwhile, other countries such as Indonesia have emerged as big buyers of US LPG for the first time. With Asian inventories still lower y/y in many key consuming countries, including India, there is little scope for the region to reduce purchases of US tonnes yet.
China has been helped in the short run by surging Saudi Arabian LPG production (and exports) as well as steady output from Iran despite the tightening grip of US sanctions on Tehran. China imported record volumes of LPG from Iran in August while Saudi exports also hit a record last month, despite crude exports declining from their June highs. Saudi supply could rise further with the Khurais NGL expansion adding up to 34 thousand b/d of NGLs. This growth will be largely absorbed by rising Chinese demand in Q4 18. Moreover, Australian LPG exports are likely to be flat y/y due to delays at the Ichthys and Prelude projects.
Matters will be further complicated once Iranian LPG production and exports decline. Tehran will have little choice but to shut in output once South Pars Condensate (SPC) storage is full. South Korean buyers are shunning SPC, and this was the main cause of a 2 mb build in onshore SPC inventories last month. At this pace, operable storage capacity for SPC could be exhausted by year-end, meaning Iranian LPG production could start to decline y/y by December.
Shortfalls in Iranian supply are problematic with US stocks at a 6.5 mb y/y deficit overall, largely due to the problems resupplying the USGC. One bit of good news on the infrastructure front appears to be the troubled ME2 project in Pennsylvania. The pipeline operator believes it could enter service by early October rather than November, which would possibly take some pressure off USGC exports by providing an outlet for inland propane rather than forcing the international market to rely solely on USGC supplies.
However, ME2 may not be enough. If PADD 3 needs to keep supplies at home this winter, Mont Belvieu will need to price to force export cancellations, which will be bullish for global LPG prices. With propane cracking expansions set for completion in South Korea in Q1 19 and the impending decline in Iranian supplies, Asian markets are likely to be tight. The battle between rebuilding inventories on the USGC and rising export demand from Asia sets the stage for strong USGC pricing this winter.