Viewpoint: US C5 prices poised to remain weak

US natural gasoline prices are poised to remain weak throughout the rest of the first quarter diluent season as growing condensate production in Canada offsets the need for Gulf coast volumes.

Mont Belvieu, Texas, EPC natural gasoline averaged 111.6¢/USG in November, down from the average 135.9¢/USG seen in November 2017. December averaged 101.14¢/USG, down from 133.3¢/USG in December 2017.

Typically Gulf coast natural gasoline sees support from Canadian demand for diluent during the winter months. Increased production of diluent in Canada has resulted in ample inventories of condensate and similar light crudes, curbing demand for Gulf coast natural gasoline. Production of light crude in Canada was expected to reach a 2018 high of 2.4mn b/d in November. Increased transportation of crude by rail, which doesn't require diluent, is also weakening demand for Gulf coast natural gasoline.

Lower prices for Canadian condensate have weighed on Gulf natural gasoline. Natural gasoline stored at the LST cavern at Mont Belvieu, which connects to the northbound Explorer pipeline serving Canadian markets, usually sees a premium to the EPC cavern because of strong winter demand. But LST C5 averaged a 4.5¢/USG discount to EPC in November because of the weaker demand while in November 2017 LST averaged near parity to EPC. In December, LST natural gasoline averaged a 3¢/USG premium to EPC.

The slowdown in diluent demand from Canada could persist because of high diluent inventories. Production in Canada is so high Enbridge is considering reversing the 180,000 b/d Southern Lights pipeline that carries natural gasoline from the Chicago area into Canada and converting it to crude service instead. The planned reversal of the Capline pipeline between St James, Louisiana, and Patoka, Illinois,would also eliminate a path to move natural gasoline north.

The lack of diluent demand is leading to increased natural gasoline supplies on the US Gulf coast, which further pressures prices and is leading to steady waterborne exports. At least three to five cargoes of natural gasoline leave the Gulf coast on a monthly basis.

Natural gasoline is also seeing downward pressure from weakness in international naphtha prices and crude futures. EPC natural gasoline averaged 82.1pc of WTI in November, weaker than the 101pc of WTI averaged in November 2017. Natural gasoline averaged 85.9pc of WTI in December, down from 98.7pc averaged during the same time in December 2017.