Despite growing petrochemical demand, prices were pressured by US imports that hit an eight-month high, writes Yasmin Zaman
Northwest European propane prices declined relative to crude and northeast Asian prices last month despite a flare-up in Middle Eastern hostilities and stronger petrochemical sector interest as a strong flow of imports from the US weighed on values.
European cif Amsterdam-Rotterdam-Antwerp (ARA) propane swaps fell by 4.5pc to $530/t over 8-28 July following the resumption of the Mideast Gulf conflict, while Ice Brent crude increased by 13pc and the equivalent northeast Asian Argus Far East Index (AFEI) propane swap firmed by almost 10pc to $707.50/t from $644.50/t. The spread between front-month cif ARA and AFEI paper consequently widened to $195.50/t from $90.25/t.
This softening in Europe came after the region was sufficiently competitive in early July to attract a significant number of US cargoes to its shores. But the more recent shift in pricing has made Asia-Pacific more appealing again.
Physical large cargo prices in northwest Europe, meanwhile, fell by $2/t to $7.50/t against the front-month cif ARA swap, reflecting a weaker market. This was despite softer prices making propane increasingly competitive as a petrochemical feedstock. The propane discount to naphtha widened to as much as $304/t on 31 July from $138/t on 8 July.
The stronger discount to naphtha lifted demand from petrochemical producers with flexible steam crackers. Demand also grew following the restart of US chemical firm Dow's 600,000 t/yr cracker at Terneuzen in the Netherlands in June after a year off line, as well as the restart of Spanish firm Repsol's 410,000 t/yr cracker in Sines, Portugal, in May after around three years of downtime. The former can run up to 80pc LPG feedstock and the latter up to 70pc, according to Argus. Imports to Terneuzen and Sines combined are expected to have reached 261,000t in July, up by almost 195,000t a year earlier, according to Kpler data.
This added demand nevertheless failed to support prices because of pressure from strong and resilient arrivals of US LPG to northwest Europe despite the intensifying conflict between the US and Iran in the Mideast Gulf. Imports from the US are forecast by Kpler to have stood at around 591,000t in July, an eight-month high. Additional inflows from Africa reached 80,000t, with almost 60pc of this from Algeria and the balance from Equitorial Guinea, further boosting regional supply and taking total import availability well above recent norms.
Taking stock
European inland demand from LPG distributors remained seasonally weak in July because of a lack of heating needs and backwardated forward prices discouraging stockbuilding. The unusual backwardated structure this summer, in line with crude, is largely due to global market expectations that LPG prices will soften once the war ends, freeing up supplies from the region. An El Nino event may also reduce heating demand this winter in core northern hemisphere markets.
The weakening physical premium to front-month paper on the cif ARA large cargo propane market suggests prompt supply remains more than sufficient to absorb additional buying interest from the petrochemical sector. While stronger Asian prices have recently reopened arbitrage opportunities for US cargoes to Asia-Pacific, the impact on northwest European balances is unlikely to be felt immediately given the volume of product already en route. As a result, prices are likely to remain under pressure this month unless US export flows slow materially or distributors begin building inventories ahead of winter.
Any sustained reduction in imports to northwest Europe this month could help stabilise the market. But for now, ample supply is set to keep northwest propane prices under pressure and at a discount to competing regions and naphtha.
