US propane shipments to offset lower European output

Slow demand growth and limited petrochemical support are highlighting an uncertain outlook for the propane market this year, writes Waldemar Jaszczyk

The European propane market is unlikely to struggle with supply in 2023, with weaker regional import demand and a long global market expected to offset reduced local availability.

The market heads into 2023 with limited support from its traditional demand sources — heating and petrochemicals. Ethylene cracker operating rates have dipped below levels seen at the start of the 2008 financial crisis, as demand for all downstream products has fallen. There are hopes for a petrochemical market bounce, but the mood for early 2023 is pessimistic given macroeconomic worries.

The heating market could become the key driver of delivered large cargo prices to the Amsterdam-Rotterdam-Antwerp hub, given muted petrochemical sector demand, by taking a larger share of total consumption. But average regional temperatures have been elevated since the start of winter, despite a cold snap in northern Europe in early December. And they have risen to historical highs in parts of mainland Europe in early 2023, including nearly 20°C in Poland, to the alarm of meteorologists. The longer-term weather outlook is uncertain, but the current signs suggest Europe's 2022-23 winter will be well above average.

Large cargo propane prices have subsequently fallen since March 2022, to as low as $510/t on 20 December, ending the year at $544/t, having been above $700/t during the summer. Propane prices have also slumped relative to crude, falling by 30 percentage points to 89pc by the end of 2022 from a year earlier.

Northwest Europe should still attract US propane imports this year despite weak regional prices owing to increasing US production, slowing demand growth in Asia-Pacific and higher freight costs for long-haul shipments. Asia-Pacific's pull on US exports weakened considerably in 2022, as the Chinese petrochemical sector struggled in the face of domestic Covid-19 restrictions and a faltering global economy. Beijing recently eased its zero-Covid policy but this has had limited upside for LPG demand and the continuing pandemic-related challenges in the country should cap any immediate resurgence in import demand.

Worsening delays at the Panama Canal have compounded this issue for US exporters by increasing the cost for exports from the Gulf coast to Asia-Pacific and the journey length. VLGC freight rates hit a seven-year high of $208/t in early December on the Houston-Chiba route from the Gulf coast to Japan, cutting margins for US exporters. Panama Canal delays and freight rates fell at the turn of the year, but congestion and higher shipping costs are likely to continue causing problems in 2023 despite an influx of new VLGCs into the global vessel pool.

Christmas stocking

Stunted demand from Asia-Pacific has collided with higher US output and lacklustre heating demand, allowing US propane stocks to rise to 90mn bl prior to Christmas, almost 28pc above a year earlier. US stocks fell to 80.7mn bl by 30 December after a severe cold storm hit the north of the country, but this was still more than a fifth higher on the year. As a result, northwest Europe has continued to receive an elevated flow of US propane imports despite netbacks to Asia-Pacific regularly being higher since mid-October. European netbacks of $4.75/t in the fourth quarter of 2022 were down from $12/t in the first three months of the year.

But US imports to northwest Europe rose by 48pc from a year earlier to 1.26mn t in the fourth quarter. They stood at 343,000t in December, down by 28pc, but are on course to climb to 600,000t in January, which would be up by 60pc on the year, Vortexa data show. Overall, US imports to northwest Europe increased by 63pc to 5mn t in 2022. This will help Europe offset a growing deficit created by falling upstream output from the North Sea and from the region's refineries owing to high natural gas prices, which are likely to persist.

European propane curves 2023

European propane prices

US LPG exports to Europe