We would like to wish all our readers happy holidays.
Global LPG prices took another body blow last month amid plunging crude prices, weaker naphtha and lingering uncertainty about possible OPEC+ production cuts. As the market awaits price direction out of the 6 December OPEC meeting, one of the big questions for markets is: how would any cut be replaced by rest-of-the-world production and who best stands to benefit?
While supply cuts might seem bullish, the already depressed LPG market faces some significant headwinds. China’s LPG demand was robust in October, hitting a record 2.04 mb/d (+0.31 mb/d y/y) but a warmer start to winter and the impact of the US-China trade war was reflected in China’s November LPG imports. In light of the 1 December US-China ‘ceasefire’ we are more optimistic than before on Chinese demand, even though challenges remain. Lower gasoline demand, weaker car sales and signs of an economic slowdown in China will take time to turn around. The likes of India, Pakistan and Indonesia however, are stepping up their LPG demand, and increases in their October LPG imports bode well for future appetite.
For now, weaker Asian and European petrochemical margins could result in lower operating rates and softer feedstock demand. A possible excess of ethylene and polyethylene production next year could also see petrochemical players backing out LPG in favour of naphtha, which currently offers the most favourable margins, to reduce light olefins output.
New supplies are expected in Q1 19, including Inpex’s Ichthys and Shell’s Prelude projects in Australia, Altagas’ Ridley Island propane terminal in western Canada and Banagas’ CGP III in Bahrain, although the full brunt of their effect on the global supply pool is likely to be felt in mid/late Q1 19. Still, it seems increasingly likely that US production could fill any possible supply gap created by potential OPEC+ cuts and incremental Asian demand. US LPG production in September reached an all-time high of 1.88 mb/d, up 0.3 mb/d y/y and November LPG exports were up 0.11 mb/d y/y in November to 1.12 mb/d. Moreover, the drop-off in Iranian LPG exports may not be as severe as initially thought with the nation moving cargoes to Asia via STS transfer.
But there are pockets of strength to be found. Despite rampant US production and loadings, federal data—which does not differentiate between y-grade and purity product—could be masking the actual supply levels and thus how tight the balance really is. We peg PADD 3 purity propane inventories at 39 mb in November, compared to the 43.8 mb reported by the EIA, which is 3.7 mb higher y/y, rather than 8 mb higher y/y according to government data. Competition for spot propane could develop, should US demand get a boost from unexpected weather demand and Mont Belvieu prices surprise to the upside in order to keep supplies local. Rising Rhine water levels will also reduce loading restrictions in ARA, increasing flows inland.
The question now is whether lower Middle Eastern exports can be offset by growing supplies elsewhere. While Asian LPG demand continues to grow (by over 0.6 Mt per month this year), cheaper naphtha and warmer weather will back out LPG, limiting the upside. Despite the truce between China and the US, macro sentiment remains fragile. Over the winter, the balance of risk is more to the downside, barring big OPEC cuts, with Q2 19 looking more bearish as new fractionation capacity ramps up on the US Gulf Coast and global demand weakens.