'Almost' perfect storm hits LPG prices

An "almost" perfect storm of factors in Europe is behind the supply squeeze that has seen LPG prices move to multi-year highs, Argus' vice president LPG, David Appleton, told delegates at Liquid Gas Europe's European LPG Congress today.

Propane prices cif Amsterdam-Rotterdam-Antwerp (ARA) have gained around $250/t since 1 June to $778/t yesterday, and butane prices are up by around $240/t over the same time at $753/t, each marking the highest since 2014.

Appleton said the squeeze is a result of a combination of supply issues. Low US stock levels are limiting exports just as European buyers are looking to rebuild inventory, and any product that does leave the US is finding more attractive netbacks in Asia-Pacific. Nearer to home, low European refining rates are capping supply and this is compounded by Algerian supply disruption and ongoing steady reductions from Russia.

Appleton said he applied the "almost" caveat because the situation could soon be tempered.

"September is not February", he said. With the northern hemisphere not yet in peak heating season, much of the current upside price pressure is due to demand for stock-building, and the resultant inventories may prove sufficient as winter unfolds. This would see current prices mark a peak for this winter, given that hey largely reflect demand that has been brought forward.

Appleton said stocks are low now because of very strong demand for heating "in all three key regions" — north America, Europe and Asia-Pacific — last winter. And this has no bearing on how conditions may unfold this year, he said.

Lastly, and crucially, "consumers who swing between propane and naphtha are simply not in the market at all" as buyers, said Appleton. A lack of this discretionary buying could see prices sharply tail off if the current sole prop on the buy-side — heating demand, or heating stock-building demand — subsides.

Pivoting to a forward view, Argus' LPG consultancy principal Kristen Mueller painted a fairly bullish outlook for demand, albeit it with some downside risks highlighted.

Mueller expects demand recovery as the pressure of Covid-19 on transport and commercial markets subsides next year. Flexible petrochemical demand will return as Mueller forecasts naphtha to return to its historically-predominant premium to rival feedstock propane. Over 2022 and 2023 demand patterns will return to "a world that looks a little bit nearer to 2019," she said.

Mueller highlighted a swathe of capacity additions from new propane dehydrogenation (PDH) facilities. China provides the bulk, with seven new PDH plants due to come online in that country this year, eight next year, and nine in 2023, giving an estimated 16.2mn t/yr of additional demand. For comparison, overall European LPG demand from all sectors is forecast by Argus at around 40.25mn t this year.

With so much new forecast demand pegged on PDH plants, propane is increasingly reliant on propylene markets. Mueller highlighted that at current PDH capacity, just a 10pc drop in Chinese operating rates can instantly take 1 mn t/yr out of global LPG demand. With PDH capacity set to double on the new sites by 2023, the effect of any reduction in operating rates is going to lead to larger and larger impacts on global balances.

On the supply side, Mueller said major LPG producing regions — north America and the Middle East — will significantly, and steadily, increase output in the next five years.

By Peter Wilton