US LPG exports and production to grow in 2022

Despite lingering concerns over stocks and the shadow of Omicron, output is expected to grow, write Amy Strahan, Abby Downing-Beaver and Ethan Stafford

US LPG exports to Asia-Pacific are expected to continue to grow in 2022 as strong petrochemical demand in the region bolsters the sector's buying of US feedstocks, particularly propane, while domestic production expands.

The US continued to ship more than twice the volume of LPG to Asia-Pacific compared with Europe in the second half of 2021, even as a spike in European heating demand early in the fourth quarter improved the arbitrage from the US. The country's LPG exports to Europe totalled 2.16mn t — about 295,000 b/d assuming this was mostly propane — in September-November, according to oil tracking analytics firm Vortexa, down from 2.3mn t during the same period of 2020. In contrast, exports to Asia-Pacific continued to account for the lion's share of US exports, rising to 7.1mn t — roughly 969,700 b/d of mainly propane — in the same three-month period from 6.69mn t a year earlier.

US exports increased as the arbitrage to Asia and Europe widened sharply after propane prices at the Gulf coast hub of Mont Belvieu in Texas retreated from seven-year highs in October 2021 on low inventory concerns. US Gulf coast fob propane prices stood as low as a $189/t discount to Japan delivery prices on the Argus Far East Index on 17 November 2021 — the widest discount since the end of January 2021, when concerns over heating fuel supplies in parts of Asia pushed delivered propane prices higher. The wide differential in mid-November followed strong pre-buying of LPG cargoes ahead of winter demand in Asia-Pacific early in the month, even as US buying interest waned late in the fourth quarter.

US LPG retailers, concerned over historically low propane inventories, pre-purchased needed volumes for the domestic heating season in September and October, and by November had largely left the spot market, leaving US propane at Mont Belvieu comparatively weak to the international market. US propane inventories remained 16pc below year-ago levels at the start of December, according to US government agency the EIA.

Discussions for spot-loading propane cargoes out of the US Gulf coast hit a 2021 high of 9¢/USG over Mont Belvieu EPC propane in mid-November, as Asian demand picked up. Prices subsequently fell to a near 5¢/USG premium as term LPG buyers appeared well supplied and uncertainty over freight delays left traders unwilling to purchase incremental cargoes, despite the wider arbitrage on paper.

Propane shortage fears abate

US production and exports of propane are expected to rise this year as the concerns over shortfalls this winter eased in the fourth quarter. Mildweather in November and early December moderated draws on stocks, which had been more than a fifth lower than year-earlier levels for much of last year following the extreme cold weather in February 2021. The strong increase in global LPG prices from late in the third quarter until November 2021 owing to fears over inventories was "a bit overdone", US midstream firm Targa Resources senior vice-president Rob Donaldson said last month.

A shortage of propane in the US this winter is now less likely, but market participants continue to worry that strong export demand will create further tightness into 2022, shortening the off-season for propane producers. Should that occur, inventories may not build adequately again before the 2022-23 heating season, repeating the inventory concerns later next year.

US propane stocks declined by a significant 3.6mn bl to 66.5mn bl (5.36mn t) over the week to 24 December, EIA data show. But the relative stability of inventories in the fourth quarter meant that this was only 11.6pc lower than a year earlier, compared with 29pc lower in early October 2021. US production of natural gas liquids (NGL) remained steady at 5.54mn b/d at the end of the week to 24 December, up from 5.31mn b/d a year earlier, EIA data show.

The fall in US propane prices from the October highs and the widening of arbitrages to Asia-Pacific and Europe has increased export demand. But prices at the Mont Belvieu hub remain above 100¢/USG on average. Mont Belvieu LST stood at 110.125¢/USG on 3 January, an increase of31.5¢/USG from 4 January 2021.

Supply fears and a wide arbitrage to Asia earlier in 2021 drove Mont Belvieu propane prices to 151.875¢/USG on 4 October, more than double a year earlier. This led the EIA to forecast a 54pc increase in retail propane expenditures during the winter based on a projected 3pc increase in heating-degree days compared with winter 2020-21. At the same time, a wider propane and ethane price spread in 2021 led to midstream operator Enterprise buying back spot propane cargoes sold on the domestic market in the summer.

But mild weather in autumn 2021 led to a lack of demand for heating and crop drying, allowing stocks to recover and easing concerns heading into 2022. In addition, Targa and peer Energy Transfer plan to expand NGL production this year. Targa expects to add another 250mn ft³/d (2.58bn m³/yr) of gas processing capacity in the Permian basin of west Texas and New Mexico, where it is currently capable of processing 662,000 b/d of NGLs. Energy Transfer hopes to complete the final part of its 250,000 b/d Mariner East 2X NGL pipeline by March 2022, which will boost supplies from the Marcellus shale basin in the US northeast and allow it to export more from its 340,000 b/d Marcus Hook terminal on the east coast.

Omicron won't cap output growth

US NGL production is also expected to continue rising in 2022 as crude and natural gas output rebounds to pre-Covid levels. As restrictions ease and vaccination levels increase, producers anticipate a weaker economic impact from the latest Covid-19 and Omicron variant outbreak — further lockdown measures from recent rising infection rates for now seem unlikely. This will create a more stable environment for producers to continue increasing NGL output.

The EIA has forecast a temporary slowdown in oil demand because of Omicron, although it is not expected to overturn the predicted recovery in the agency's latest Short-Term Energy Outlook (STEO). The EIA estimates natural gas production will increase to 96bn ft³/d in 2022, a 3pc increase over 2021, while crude output is forecast to be 11.8mn b/d, up from 11.2mn b/d.

Gains in crude and natural gas production will bolster NGL supplies from gas processing next year. The EIA expects NGL output to increase to 5.84mn b/d in 2022, raising its forecast by 8.8pc in its latest STEO.The agency expects propane output to rise to 1.81mn b/d from 1.73mn b/d in 2021.US butane from gas processing is expected to have averaged 913,500 b/d in 2021 and to rise by 5.3pc to 962,100 b/d this year, according to the EIA.

US butane exports increased to a record high 472,000 b/d in April 2021 as the arbitrage to Asia-Pacific remained wide open, while many countries in the region faced lockdown restrictions that boosted retail demand from the residential sector. As these restrictions eased, exports from the US correspondingly fell, approaching year-earlier levels by September at 343,000 b/d.

Mont Belvieu EPC butane prices averaged 118¢/USG in 2021, double the average price in 2020 and up by more than 80pc from the 2019 average. As a percentage of Nymex WTI crude, butane averaged 72.4pc in 2021, up by 9.8 percentage points from 2020 and 24.4 percentage points from 2019.

Record exports fuelled the strength of butane relative to crude last year as the arbitrage to Asia-Pacific remained opened throughout the year. But a continued economic recovery may reduce export demand this year if production builds in key importing regions, weighing on prices relative to crude.