Fall guy

Published at 10:54 5 Oct 2018 by . Last edited 15:12 5 Nov 2018.

The sudden rally in crude prices over the last few weeks has given LPG buyers pause as the heating season has not yet arrived in full force. Barring a major economic slowdown, petrochemical demand will remain robust into the New Year, giving fresh impetus to prices, particularly with US infrastructure bottlenecks a long way from being resolved. But in the short run, the market is clearly taking a breather after running higher and with heating demand yet to kick in, buyers are happy to pick up only the cargoes they need, which has stalled the rally.

Butane was the star this summer as China sought feedstock for gasoline-making units at refineries and petrochemicals plants amid tightness in octane in the country ahead of the switch to China-VI specifications. The major Chinese refiners are bringing online new alkylation units and these have stoked Chinese butane import needs by reducing the amount of butane sold by Chinese refineries. But the octane tightness is fading and will be all the more manageable as giant new gasoline and petrochemicals-focused independent refineries start up later this year.

But even if the growth of China’s butane requirements slows, the country will still need to increase propane imports this year to feed its PDH plants and restock depleted inventories. Thus, the tariffs Beijing slapped on US-origin LPG are only leading to cargoes being redirected.

Further support for propane comes, indirectly, from the US ethane market. Soaring demand for ethane represents a challenge for propane production as it crowds out incremental barrels from fractionation capacity. US ethane surpassed 60 cents/gal in mid-September as limited fractionation capacity at the Mont Belvieu pricing hub enabled holders of walk-up frac capacity to charge whatever price the market could bear. With up to five new steam crackers expected to add around 0.24 mb/d of ethane demand on the USGC by Q2 19 but only 0.22 mb/d of new fractionation capacity is set to come onstream in H1 19, there is unlikely to be any real respite on this front in the near term.

Moreover, despite the recovery in USGC inventories that took stocks to 39.5 mb as of the last week of September, just 2.4 mb lower y/y, all may not be as well as it appears. US NGL data do not distinguish between purity products and unfractionated NGLs. Given the numerous reports of participants storing unfractionated NGLs (known in the US as y-grade) in caverns traditionally designated for the storage of purity products, there is a good chance that the stock levels reported by the EIA overstate what is available to the market.

US stock levels will become even more important next month as the most stringent US sanctions against buyers of Iranian oil and oil products kick in. Crude has been first to react, realising all too late that the uncompromising stance set forth by Washington means that Iranian crude exports are set to fall below 1 mb/d then. The condensate story in Iran has continued to worsen, so we stand by our view set forth last month that condensate (and South Pars LPG) production will likely be shut in by year-end or January. Despite the recent retreat in spreads due to the slowdown in buying following the crude rally, the mood in the market still seems quite bullish. As the world enters peak LPG demand season, markets are entering unchartered territory and the fundamentals point towards an explosive winter for LPG prices. It is just a matter of when.

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