Fine line

Published at 11:35 2 Nov 2018 by . Last edited 17:38 13 Nov 2018.

Despite good demand, imminent Iranian supply declines, and plenty of US infrastructure constraints, LPG prices were sent into a spiral last month by falling naphtha prices and low Rhine levels that backed LPG cargoes into ARA. Low Rhine levels will continue to be a problem, as will the weakness in naphtha, but the market has probably dealt with the worst for now.

Asian demand looks solid and the fall in crude prices should stimulate demand from price-sensitive buyers. Chinese LPG stocks are 19 ppts lower y/y at 24% of capacity as of September, and refinery works continue to limit supplies in some regions. India will commission its Paradip–Haldia–Durgapur LPG pipeline this month, which should help to continue to unlock latent demand. Overall Asian LPG import requirements should grow by 85 thousand b/d through end-Q1 19, while Middle Eastern LPG export growth could fall short if Iranian LPG is off limits. But there are some headwinds on the horizon. LPG will face lower demand from the petchem sector as cracker margins are at multi-year lows amid rising US polyethylene exports. For now, though, LPG looks like it will remain the favoured feedstock through year-end.

Over in the US, a burst of new infrastructure has significantly increased both dry gas and y-grade takeaway in Appalachia, and Energy Transfer’s long-delayed Mariner East 2 (ME2) pipeline is set to come online this month, if only at partial capacity. In October, PADD 1 LPG growth surged by 30 thousand b/d m/m and exports out of Marcus Hook hit a record 0.1 mb/d. Incremental LPG export growth may be in the region of 20 thousand b/d initially, but it could be higher if the 20-25 thousand b/d of propane currently railed to PADD 2 from PADD 1 is sent east instead.

In isolation, ME2 could be bearish for USGC ethane and LPG prices, as Northeast exports displace USGC barrels to Europe. Ineos and Borealis will likely import less PADD 3 ethane, substituting it with Marcus Hook exports. For LPG, there is also a lot of uncertainty around the ratio of unfractionated product to purity product in PADD 3 stocks. While around 50 thousand b/d of propane production capacity has been added this year on the USGC, exports have been 0.11 mb/d higher y/y over May–Oct and PADD 3 propane receipts from PADD 2 over Jan–Aug were lower as ethane was preferred. Y-grade flows into Mont Belvieu are also picking up—the Sand Hills pipeline hit a record throughput of over 0.4 mb/d in Q3 18, and Oneok’s Sterling III pipeline expansion is expected to bring more y-grade down to the USGC in Q4 18, with no fractionation capacity attached at its Mont Belvieu terminus.

Meanwhile, Iranian LPG exports fell by around 45% m/m in October to 0.3 Mt and Oriental Energy ceased importing Iranian LPG. Iran has so far found ways to store or blend condensate, and it is now likely that the US may grant some small waivers to South Korea on condensate—this would prolong any production shut-ins but not stop Iranian LPG from being off-limits.

Though LPG markets are facing short-term headwinds, we ultimately view global demand as robust, with the full brunt of winter and new petrochemical capacity starting up, and the new year restocking period on the horizon. As such, we consider current global prices to be somewhat overdone. US purity product stock levels remain a concern for the market at a time when LPG demand seasonally peaks, meaning prices could surprise to the upside.

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