Viewpoint: NWE LPG market to be driven by US exports

Steady US LPG export volumes this winter will weigh on northwest Europe propane prices, as demand is likely to be stagnant compared with the previous year. Propane will stay at a discount to naphtha, and petrochemical demand will as usual act as the balance for the former.

US seasonal stockdraws began late this year. Consecutive weeks of draws started in November from a peak of 84.5mn bl, compared with a mid-September start from 82.2mn bl last year. US propane stocks totalled 79.8mn bl in the week ending 30 November, 7pc higher than at the same time last year. More importantly, restocking has been accompanied by steady LPG exports — an average 911,000 b/d between August and November, compared with 808,000 b/d in the same period last year.

Three to four very large gas carriers (VLGCs) will arrive monthly from the US in the first quarter of next year — a number in line with the first half of this year. This flow could fall to between two and three in the second quarter, when regional demand for domestic heating will drop.

The US export levels have kept propane large cargo cif ARA (Amsterdam-Rotterdam-Antwerp) values low compared with crude and naphtha. The propane-naphtha spread averaged -$58.5/t in November, compared with -$13/t in the same month last year. This kept petrochemicals producers in the propane buyers' pool as winter got underway, a situation likely to continue throughout the winter as geopolitical developments support the steady arrival of US tonnes.

China, a major importer of US LPG for its growing network of propane dehydrogenation (PDH) plants, applied a 25pc import tariff on US LPG in August, as trade tensions escalated. The move was by-and-large anticipated and US exports were diverted to other destinations. Six VLGCs shipped US LPG to northwest Europe in October, up from three in the same month last year, and four moved on that route in November compared with one a year earlier.

This frequency will continue next year, as US export capacity ramps up. The Mariner East 2 pipeline has started taking commitments for transport of natural gas liquids (NGLs), which include LPG, from the Marcellus shale in Pennsylvania to the Marcus Hook export terminal. It will come on line by year-end, and on reaching full capacity by the third quarter of 2019 will boost the terminal's export capacity to 6-8 cargoes/month, from 2-3/month currently. The journey to Europe from the Atlantic coast terminal takes around 12 days. Midstream firm Enterprise will expand its export capacity on the US Gulf coast by 175,000 b/d to 720,000 b/d by the second half of next year.

The increased US LPG export volumes will only find their way to Europe if local buyers offer competitive netbacks compared with their Asia-Pacific counterparts. The number of VLGCs directed to Europe can dry up if European premiums fall below those of competing Asia-Pacific buyers.

The European LPG market has felt only a limited effect from US sanctions against Iran, which is the source of marginal tonnes. Imports from Russia are more substantial, especially from the Sibur-operated Ust-Luga terminal in the Baltic Sea that has exported around 200,000 t/month so far this year. These could fall should the EU impose sanctions in reaction to Russia's annexation of Crimea, a possibility recently revived by tensions on the Azov Sea. In the absence of any punitive moves, Russian LPG exports to Europe will remain steady next year.

With US exports steady, propane prices will hover at a $50-75/t discount to naphtha, in line with the previous two winters, and only briefly move below or above this range. Propane was at a premium to naphtha for several weeks last winter because of a shortage of US exports, which will not repeat this winter.

Demand for heating, which lifts prices in winter, will be stagnant in northwest Europe this year. The forecast is for mild temperatures except for a colder period on both sides of the English Channel and over Portugal in February.

Petrochemical firms will as ever act as the balance for the propane-naphtha spread. With propane at a significant discount, it is likely some crackers will use it as feedstock this winter. Petrochemical firms will curb their buying of propane when the propane-naphtha spread gets closer to -$50/t, and may resell some product to local buyers. This would ease upward pressure on propane prices.

Naphtha prices are likely to remain weak and the crack negative in the first half of next year, because US gasoline stocks are high and demand is faltering in Asia-Pacific. This will keep the propane-naphtha spread narrow even when the ratio of propane to Atlantic basin crude benchmark North Sea Dated reaches unseasonably low levels, such as sub-parity.

Propane's ratio to Dated has been volatile in recent years, bottoming at around 75pc in 2014 and peaking just above 120pc last year. Strong demand for domestic heating keeps the regional market reactive to supply gaps, which can send propane prices to a premium to crude. The flexibility offered by US supply, in terms of availability and short sailing time, reduced this volatility this year and put pressure on propane values. The ratio of propane prices to Dated will remain between 90pc and 110pc during the winter, then decline slowly in the second quarter when heating demand fades out.

Propane prices will quickly fall in the spring when warmer weather removes one main source of demand, and the petrochemical turnaround season — which begins in May — removes the other. The derivatives market indicates propane large cargo cif ARA prices will fall by around $30/t between February and May, at constant crude prices.

Rhine river water levels will continue to raise concerns for distribution. The average level at bottleneck Kaub averaged just 48cm throughout October. Levels have risen recently, but forecasts are for a further fall. If freezing temperatures arrive and stay in northwest Europe before the river has been able to refill sustainably, this could generate significant supply problems for German retailers and end-users.

Butane large-cargo cif ARA spot activity was lacklustre this year, with only two deals recorded in the open trading discussion. With little buying interest, the ratio of butane to naphtha has fallen to 80pc in early December, a few percentage points below the 15-year average range. Butane prices will remain at a steep discount to naphtha during the winter, but could find its place as the preferential petrochemical feedstock in periods of propane tightness. This would put a floor to the value of butane at around 75pc of naphtha.

Demand for butane in northwest Europe competes with the Mediterranean market. A pattern emerged in the later part of this year of US VLGCs unloading half their shipment in a Mediterranean port before heading to northwest Europe with the other half. This could benefit US producers, as exporters benefit from the scale economies of a VLGC without saturating one market. Butane imports from the US will especially become important as new petrochemical plants come online in the coming years.

UK petrochemical firm Ineos said it requires imports of more than 1.5mn t/yr to Europe to help supply its planned 750,000 t/yr PDH cracker and 1mn t/yr ethane cracker, either at Antwerp or at Rotterdam. These have a schedule to start by 2023 or 2024. Ineos will commission a significant new butane storage facility in 2020. Austria's Borealis plans to begin production at its new Kallo PDH plant, with 740,000 t/yr targeted output, in early 2022.

The US will be the source of additional LPG supply, as production will continue to rise. Enterprise expects US NGLs output to increase by 67pc from this year's level to 8.2mn b/d by 2025. Most of this increase will go to export.