Global butane prices have hit multi-year lows relative to competing naphtha and propane, but C4s are not out of the woods. Although gasoline blending season will mop up some oversupply come Q4 19, gasoline demand growth in the Atlantic basin has been modest. Meanwhile, the usual summer weakness in international butane demand has been exacerbated by a dramatic drop in split-cargo appetite from India and Indonesia. With alternative demand sources like flexicracking already maximised, the international market faces a challenge as US butane export capacity is set to jump by 0.21 mb/d in Q3 19. This enhanced ability to push barrels onto the water is predominantly producer-driven, as US supply growth consistently hits fresh highs.
US butane production in May was just 5 thousand b/d shy of the 0.42 mb/d-high watermark set in October 2018. That level should have been bested in June, when we expect supplies to have averaged 0.43 mb/d. Indeed, we are now calling for US butane production in 2019 to average 0.42 mb/d, up by 61 thousand b/d y/y. In contrast, demand for the purity product will only average 0.22 mb/d in H2 19, up by just 1 thousand b/d compared to H2 18. So, while added US export capacity may seem to be a boon for US butane prices, the risk is that the US exports its low-price problem to the rest of the world as production continues to surprise to the upside.
The final months of the shoulder season will prove challenging for those holding long positions in butane markets. To start, upcoming cracker maintenance looks particularly heavy on a y/y basis in Europe, with 0.59 Mtpy of ethylene capacity offline between August and October compared to 0.32 Mtpy in the year-ago period. We also remain cautious about petrochemical demand, especially since recent earnings results from the world’s largest petrochemical companies have been uniformly grim about prospects for H2 19. On top of that, we do not believe further significant incremental cracking demand can be gained, since butane cracking margins in the US and Europe have been superior to ethane (in the US) and naphtha (in Europe) for some time. Asia’s propane-naphtha swaps have had a more volatile ride, causing conservative producers to stick to their guns with naphtha.
The winter gasoline market is not likely to offer much help. Although demand will swing higher y/y, US gasoline demand growth has been tepid so far. The shutdown of the 0.35 mb/d PES refinery could actually reduce US butane blending demand by almost 6 thousand b/d. This demand will be made up in Europe and other places where gasoline for the US will be produced, but given the oversupply that plagued the gasoline market last winter, the loss of this refinery’s production will arguably not be made up on a one-for-one basis in Europe.
Meanwhile, the discounted August Saudi butane CP relative to propane is yet another indication of the continuing contest between the US and the Middle East to fulfil any hint of incremental butane demand. However, forward markets show that US butane resumes its more traditional premium of at least 8 c/gal over propane in August and September. This has typically incentivised storage for use in winter, but it could work against US exporters competing with the Middle East for buyers. Someone has to blink. We posit that the ongoing supply length and weaker demand will eventually hold the upper hand. Global butane markets will remain under pressure, both on a m/m basis as well as relative to propane.