NWE butane futures volumes hit record high

The volume of open ICE Argus butane cif Amsterdam-Rotterdam-Antwerp (ARA) futures positions hit an all-time record at the start of June. Open interest (OI) of 337 contracts on 1 June surpassed the previous record of 327 set in July 2016.

One contract represents 1,000t and is cash settled monthly, based on the monthly average of the daily Argus International LPG butane cif ARA large-cargo price assessments. The assessment is for cargoes of 7,000-12,000t field-grade mixed butane (minimum 20pc isobutane content) or normal butane, fully refrigerated, for delivery 10-25 days forward.

The butane OI level pales in comparison with highly-liquid futures markets elsewhere in the oil products spectrum. For example, OI in its lighter LPG counterpart — the ICE Argus propane cif ARA futures contract — had a daily average of more than 1,200 contracts in 2018 to date.

But butane OI of over 100 contracts was a notable occurrence as recently as early 2017. Three figures were breached in fewer than 50 trading days in the full year 2016. Liquidity rallied substantially in the second quarter 2017.

Driving the overall surge in traded volumes has been increased long-haul seaborne supplies of butane from the US Gulf Coast (USGC) to international markets. This has escalated the need for hedging instruments. In Europe, ex-US imports have averaged over 228,000 t/yr since 2014 according to EIA data, after an average of 18,000 t/yr across the period 2010-14.

Increased volumes of Mediterranean trade is now heard also concluded on a cif ARA basis, and accordingly then hedged using northwest European paper instruments. In north Africa, LPG used mainly for heating and cooking is heavily weighted towards butane — often as high as 80pc of total consumption. Butane's higher boiling point than propane — -2°C compared with minus -45°C — means in hotter countries it can make up a greater portion of the LPG mix. Combined ex-US exports to key north African buyers markets Morocco and Egypt have soared to more than 370,000 t/yr since 2014 according to the EIA, against 65,500 t/yr across 2010-2014.

That the 2016 record high in Argus butane cif ARA futures OI was hit in July last year and surpassed in June this year is significant. The more seasonal pattern in butane liquidity, when compared with propane, is a result of the heavier grade being used extensively as a gasoline blending component.

Gasoline markets change seasonal specifications before the start of winter with provisions for increased butane in the blending pool. Specifications revert at the start of summer, which reduces butane demand from the sector. At this juncture, falling butane prices results in increased physical butane buying from the petrochemical sector.

The cyclical nature of northwest European butane demand has in the last two years then produced a rise in butane paper trading in early summer. A combination of factors drives physical buying, and the concurrent need to employ risk management strategies. These include petrochemical firms hedging exposure to the flat price of the cheaper feedstock across the summer, and blenders locking in prompt forward prices to restock after draining tanks during the peak winter-specification demand season.