Continued weakness in global LPG prices as a result of the still-softening crude complex provides little hope for market bulls in the new year. The onset of new LPG infrastructure that was conceived when expectations were for 2019 as a banner year will clash with new market realities—a global economic slowdown and its knock-on effects on consumer demand and commodity prices. The onset of OPEC+ production cuts and US sanctions on Iran could stem near-term price weakness by reducing the amount of LPG available from Q1 19, although still-high supplies in the US and elsewhere alongside growing LPG export terminal capacity provide a strong counterpoint. Global balances look set to lengthen, which will put pressure on LPG pricing across the board this year as exporters compete to create arbitrage opportunities and find a home for their product.
The lightest portion of the NGL barrel is up for a bumpy ride as new demand tightens the chokehold over US ethane markets. With more crackers and exports on tap in 2019 and fractionation capacity still playing catch up, US ethane will likely see a repeat of 2018’s volatility as rejection economics and lagging infrastructure clash with a fresh wave of new demand. Rampant y-grade supplies from the Permian Basin and the STACK/SCOOP play collided with rising ethane demand from new steam crackers and exports, resulting in spot prices hitting a near-seven-year high of 61.2 c/gal in September 2018 before crashing by about 50% in six weeks.
Both US fractionation and LPG export capacity will rise in 2019, but the key question is can the world absorb not only more US LPG, but also supplies from Canada and Australia? While the US sanctions on Iran and OPEC+ cuts will keep a lid on Middle Eastern exports over H1 19 and help US LPG find a home in Asia, US export growth occurs towards H2 19, which sets us up for weak LPG prices in the second half of the year. The issue will be compounded if OPEC+ achieve their flat price goals by June, which would then mean they raise production and exports in H2 19.
Slowing Chinese demand will also be of concern for LPG and with the world’s biggest consumer adding several world-scale crackers and MTO plants this year, demand for petrochemical imports looks set to slow. Additionally, India in November 2018 saw its first drop in LPG demand in more than five years, due to rising domestic prices. We expect Indian demand to continue to trend downward amid further price hikes as Middle East and Iranian exports decline in the first half of the year.
Despite the sharp decline in oil prices, the pullback in US production growth will be somewhat measured due to the involvement of oil majors. This will make their output less responsive to lower oil prices. While OPEC has decided to reduce production, it is focusing on cutting exports to the west and targeting the most visible inventories—that of the US. But by doing so, Saudi Arabia will end up reducing output of medium and heavy sour crudes as no Arab Extra Light (AXL) or Arab Super Light cargoes head west. This means the drop in NGLs output will be less than otherwise, and there will be plenty of supplies amid growing exports from Australia. Overall, the imbalances between lights and heavies are only set to worsen in 2019, barring perhaps the very light end of the NGLs barrel due to sharply higher demand.