Viewpoint: US butane backwardated into 2021

Lower US butane inventories seen at the start of the fourth quarter are keeping Mont Belvieu, Texas, butane steeply backwardated into 2021.

US butane inventories were at 69.5mn bl in September, 5pc lower than the prior September, according to the latest Energy Information Administration (EIA) data available, following months of steady exports. Inventories are expected to be reported even lower in the following months as blending and export demand drains stocks. Butane exports hit a record high in August of 12.8mn bl or about 427,000 b/d, but slowed in December as rising Gulf coast butane prices narrowed the arbitrage to Europe and Asia.

As a result, Mont Belvieu EPC butane prices rose relative to gasoline, with butane rising from 50pc of Nymex RBOB 1 October to 66.3pc of RBOB on 22 December.

January Mont Belvieu EPC butane averaged a 13.1¢/USG backwardation versus the prompt month so far in December, compared with an average 0.2¢/USG backwardation during the same period in 2019. Tightness in the front month came even as seasonal domestic gasoline blending demand remained low. Implied gasoline demand was down 14pc for the first week of December compared with the same time last year, with gasoline inventories up 1.3pc versus year-ago levels at 237.9mn bl at the start of December.

Demand for butane for gasoline blending should remain limited going into the first quarter of 2021 as blending season winds down before the Reid vapor pressure (RVP) specification switch back to summer-grade on 15 March. Inventories typically begin climbing in March following the shift, but this could move earlier next year as blending demand remains slow.

Effective 1 January the Environmental Protection Agency will next yearremove a requirement to test for volatile organic compounds (VOCs) and aromatics in RBOB — an ethanol-ready gasoline blendstock common in urban areas in the US. Benzene, sulphur and RVP limits will be the only requirements that remain, potentially allowing slightly more butane blending during the summer.

Conway, Kansas, butane also saw prompt tightness this winter, with January butane averaging a 13¢/USG discount relative to December on 22 December after it average a 6¢/USG discount in the first half of December. Still, lower blending demand in the midcontinent kept the southbound arbitrage open, with Conway butane averaging a 6¢/USG discount to Mont Belvieu during the first half of December but midcontinen butane moved to a 3.25¢/USG premium relative to the EPC cavern on 22 December as buying interest picked up as participants finalized December business; in 2019 midcontinent butane prices stood at a 4.5¢/USG premium to the Gulf coast.

By Kelly Strickland and Yulia Golub