Winter seems disinclined to loosen its grasp over LPG markets, particularly the heavier liquids. While inclement weather has delayed loadings, exacerbating supply shortages in Asia and the Mediterranean, the root cause of the lingering tightness is the Middle East. OPEC+ production cuts that began in the new year have been amplified by US sanctions on Iranian exports, feverish restocking in Asia, the impending elections in India and Indonesia, and logistics problems in the US Gulf Coast and Turkish Straits.
The dearth of Iranian LPG exports is extreme, as exports averaged 80 thousand b/d in November 2018 when the US sanctions were first announced and plummeted to 17 thousand b/d in February. Lower Mideast exports to the East have led India and China to fight for any available tonnage, as their cumulative LPG imports have fallen from 0.74 mb/d in December 2018 to 0.6 mb/d in February. But there is another reason for this tightness, which is most reflected in stronger Asian butane prices: the growing correlation between butane and naphtha.
The near-term strength in LPG, particularly butane, is a derivative of the short-term strength in naphtha. Although many of the factors supporting LPG are also holding up naphtha, it faces some added tailwinds: recent condensate splitter maintenance in the UAE has removed 90 thousand b/d from the market, and rallying gasoline has meant less naphtha flowing into Asia in early Q1 19. This shortfall in naphtha has steered buyers, mainly China and Japan, to the next best alternative: butane. Butane imports from these countries have increased by 80 thousand b/d in February from December 2018 levels, while their propane imports have fallen.
The current naphtha tightness will be short-lived, however, with heavy upcoming cracker maintenance in Asia, a normalisation of eastbound flows following the recent shipping delays, and more barrels available for export in Q2 19 from North America. Once these supports fade, the effect on LPG will be to turn the focus on much less bullish factors, primarily rising production and added export capacity out of the US as well as competing LPG supplies out of western Canada and Australia. Moreover, despite the expected uptick of Chinese propane demand from the start-up of several new PDH plants this year, PDH margins have headed south since February on rising inventories in the US and new production in Asia. Should low margins linger, these new PDH units could ramp up at a leisurely pace or even be delayed.
Having said that, OPEC+ is expected to extend the production cuts into H2 19, so the continued lack of Mideast cargoes will sustain the competition for available barrels in Asia, somewhat negating the supply made available by cracker turnarounds. Additionally, the US is likely to reduce the waivers for China, India, Japan, South Korea and Turkey by 20-50% from current levels as the May deadline approaches, so Iranian supplies could fall even further.
The current tightness notwithstanding, we view Q2 19 balances as quite bearish. Winter will recede, easing the widespread shipping delays. Heavier y/y cracker maintenance will ensure a surplus of naphtha in Asia that should soften regional values, and LPG will price to compete with naphtha as heating demand diminishes. New supplies will begin trickling in around the same time, capping any upside from extended OPEC+ cuts or tighter US sanctions on Iran.