Delays to LPG exports from Saudi Arabia following last month's attacks on the country's oil facilities have added to tightness in Middle East supplies to China and India and accentuated the two-tier import market in Asia-Pacific.
The attacks forced state-owned Saudi Aramco to delay some October-loading LPG shipments for several weeks, although the company has told its term lifters they will get their full allocations.
China and India are major buyers of Middle East LPG. Chinese importers' reliance on the region has increased since the start of the US-China trade war led to punitive tariffs being imposed on imports of US LPG to China, blocking the emerging trade flow.
US exports have instead mainly been channelled to Japan and South Korea since April 2018, when the trade tensions started to escalate. Most of these flows are priced against the Argus Far East Index (AFEI), while the imports of non-US origin supplies to China are largely linked to Aramco's monthly contract price (CP).
The disruption resulting from the attacks has narrowed the spread between the two major benchmarks, and even sent fob Middle East prices to an unusual premium to cfr values for supplies from elsewhere.
October propane CP swaps — which indicate the fob value of cargoes loading in October from the Mideast Gulf — were at a $16/t discount to October AFEI swaps on 13 September, the day before the attacks. But the spread narrowed sharply in the following days, on concerns that October-loading shipments from the Mideast Gulf would be insufficient to meet demand from regional buyers.
Prompt demand from India — with three importers issuing spot tenders in quick succession for end-September to end-October arrival cargoes — further strengthened the fob market. Tightness in prompt supplies prevented most of this demand from being met.
October propane CP swaps traded $0.50/t above October AFEI swaps on 25 September, the first such premium since April, as the fob and cfr indexes reversed their relationship.
The CP's premium to AFEI rose to $5/t on 27 September amid heightened anticipation ahead of Aramco's October CP announcement yesterday. Aramco set its October propane CP at $420/t, $76/t higher than the swaps value of $344/t on 13 September.
Cash premiums for second-half October arrival propane cargoes to south China also rose sharply in the two weeks following the attacks, to $61/t from $50/t, further underscoring supply tightness for Chinese and Indian buyers.
By contrast, supply of US-origin cargoes remains abundant because of seasonally weak demand from northeast Asia and the lack of a viable outlet in China, the world's biggest importer. Cash differentials for second-half October arrival propane cargoes were at a $1/t discount to the October AFEI on 27 October, while the prompt month October-November timespread settled at a $3/t contango, indicating weaker demand for the prompt month.
