In 2016, the LPG markets will continue to grapple with the impacts of US shale gas and weak crude prices.
European propane prices spent much of 2015 at record low ratios to both crude and naphtha as global markets struggled to absorb the natural gas liquids largesse of the US tight oil revolution. At the same time, crude prices in December fell to levels not seen since the depths of the global financial crisis.
European large cargo values averaged 90pc of crude this year, dropping to a record low of 71.6pc in May. But a surge in Asian demand in November did draw more US export east and away from Europe, helping to lift propane to almost 120pc of crude's value for the first time in more than two years.
Propane's relationship to naphtha tracked a similar path. Against naphtha, propane has moved from a discount of more than $200/t in May to only $30/t in December before crude prices fell further in the wake of the Opec meeting.
The narrowing discount has done little to deter crackers from maximising propane over naphtha throughout the year. On the forward market the front month propane swap averaged a $110/t discount to its naphtha counterpart in the year to mid-December. In percentage terms, the prompt propane swap has traded at an average of 77pc of its naphtha equivalent. The current (DEC) regional front month propane-naphtha spread sits in the mid $70s per tonne. But the forward curve implies an average discount approaching three figures in 2016 — monthly spreads from January-December next year are indicated in a narrow -$74/t to -$100/t range, with the average for the 12 months at $92.67/t.
Petrochemical crackers have been a key beneficiary. The sector is the single biggest consumer of LPG in Europe, overtaking heating and autogas.
Those crackers that can have invested in increasing flexibility, enabling them to utilise cheaper lighter feedstocks than naphtha. Weak propylene gave cheap propane an extra advantage as it produces less propylene co-product. Europe's crackers now run LPG feedstocks as a matter of course with little room to take any more without substantial additional investment.
While US LPG exports have continued to grow at a tremendous pace, northwest Europe's share of the pie is shrinking. Outright amounts arriving from the US in 2015 have been marginally up on last year but the end of year total will probably not breach the 2.5mn t mark. January to November data shows a 15pc increase in US imports to northwest Europe but this represents less than 13pc of US exports, down from almost 16pc in 2014 and over 20pc in 2013.
Increasing amounts of shale gas-propelled VLGC export volumes leaving the US will grow in 2016 with increased export capacity at Enterprise. The latest expansion — planned to be operational before the end of 2015 — will allow 16mn bl/month (1.35mn t) of export capacity. In November, it exported 12.4mn bl (1.05mn t) from its terminal in the Houston Ship Channel. By the start of December 13.6mn bl (1.15mn t) had been exported to Europe so far this year from Enterprise.
Remarkable efficiency gains by US shale oil producers have fended off much of the expected impact of sharply lower crude on production. Total production of propane and propylene hit a record high of 1.674mn b/d in the first week of December even as the Saudis reasserted their determination that Opec follow their market share strategy. By the end of 2015, US natural gas liquids production will be as high as the next four largest producers — Saudi Arabia, UAE, Qatar and Canada — combined.
With Iranian crude likely to return to the open market early in 2016, the prospects for outright crude prices are not bullish. And, at some point, US NGL production will slow.
But the latest short term energy outlook from the US EIA still estimates total exports of propane, propylene, butane and butylene growing from over 18mn t in 2015 to 24.5mn t in 2016.
Total production of propane, propylene, butane and butylene from both refineries and gas processing is forecast to grow from 72.1mn t in 2015 to 76.4mn t in 2016, with domestic US consumption up from 40.1mn to to 41.2mn t over the same period. This would leave over 35mn t for either export or stock builds, compared to 32mn t in 2015.
US domestic propane and propylene stocks breached the 100mn bl mark for the first time ever in September and have continued to grow through to late November as a thin drying season was followed by a largely mild autumn. But an observer would have been unlikely to guess this from the price action with Mont Belvieu gaining relative to crude. Since June, Enterprise wet propane has moved from an all time low of 23pc of WTI to around 40pc, not far from the average since shale oil became a factor in 2012-13. Over the same period, US propane stocks have grown by a fifth from 80mn bl to past 100mn bl.
The prospect of additional export facilities — with Enterprise on the Houston ship channel and Sunoco at Marcus Hook opening new opportunities to clear out surplus LPG — is apparently sufficient to support US domestic prices. The forward curve shows a slim contango at the front of the curve dropping back into backwardation from March. Overall, US prices are remarkably rangebound throughout the first half of 2016 and then show a sharp increase in the fourth quarter.
But export facilities do not translate into export markets without a workable arbitrage. European and Asian forward curves are going into the winter with unusually backwardated forward structures. Against the US structure, this will further squeeze export profitability unless US prices drop, Asian and European prices gain, or freight costs shrink.
In 2016, VLGC rates look set to drop. By the end of the year the fleet's capacity will have grown by over 50pc. Growing tonne-miles of demand from the increasing flows from the US to Asia will absorb much of this, especially with the long-touted spring opening of the Panama canal expansion looking increasingly dubious. But few expect to see prices on the Mideast-Japan market route return to the plus $100/t levels seen regularly over the past couple of years.
The advent of a large number of VLGC volumes entering northwest Europe has undermined the widely-used ToT contract, which was employed successfully for more than a decade. This takes into account mid-size ships (20,500t) but, after two 20,500t ToT cargoes are taken into account, 44,000-47,000t VLGCs are left with tonnes to spare — potentially a third, expensive, disport for a small parcel. As a result, a proposal to replace it with a new contract, known as the FoF, with a further-out delivery period to accommodate the increased volumes and sailing days from the US is being rolled out in January 2016. All eyes are on whether the market will embrace the new contract and whether it will work in its aim of drawing more US supplies to Europe.
