Corrects timing of terminal expansions in last paragraph of 27 December story.
Exports are unlikely to ease a chronically oversupplied US propane market in the first quarter of 2024 as Panama Canal restrictions and limited vessel availability mean US traders will not be able to act nimbly, even as the arbitrage to Asia widens in the face of weakening US prices.
Drought-related restrictions limiting transits through Panama imposed in late October upended the normal trade flow of US propane shipments to markets in Japan, China, and Korea, causing a spike in spot VLGC freight rates and narrowing netbacks on paper in late November and early December. VLGCs were forced to divert away from Panama in November and December due to longer and more costly transits via the Suez Canal, which can add $75-$100/t to rates versus Houston-Chiba freight via the Panama Canal.
In the meantime, LPG shippers who could not wait paid $1mn-3mn at auction for transit slots at Panama in December, adding anywhere from $21.74-$65.22/t to the cost of the shorter route.
The transit delays and higher shipping costs stymied what had been a robust export market out of the US. Propane exports rose a record high of 2.13mn b/d the week ended 6 October, according to the US Energy Information Administration (EIA), but fell to an average of 1.7mn b/d in the weeks following as shipping costs increased.
The price of spot propane cargoes on a fob basis out of the US Gulf soared in October but reversed course in November and December as higher freight costs eroded netbacks into the Asian market, which accounts for more than half of US exported volumes. Three Gulf coast export terminals experienced unplanned maintenance in October, causing delays to loading schedules, after weeks of triple-digit temperatures in August taxed refrigeration equipment.
The resulting tightness in available cargoes pushed spot terminal fees as high as 21-22¢/USG by the end of October, the highest levels recorded since January of 2020. This was short-lived, however, as transit restrictions at Panama took effect in early November, sending charterers scrambling for available vessels and causing VLGC freight on a Houston-Chiba basis via Panama to rise as high as $250/t in mid-November, the highest values on the route since mid-2015. The $250/t figure equated to roughly $325-$350/t on the cost of the route via the Suez Canal, effectively shuttering the arbitrage, as the January spread between Argus Far East Index (AFEI) and Mont Belvieu, Texas, paper stood just over $300/t at the time.
The higher freight and delays caused a sell-off of cargoes in late November and early December. A 5-7 December loading was cancelled by a term lifter and subsequently resold by the terminal at levels near Mont Belvieu +7¢/USG, and subsequent cancellations were heard repurchased by a trader with their own vessels at levels near 5¢/USG. By mid-December, terminals were offering late January spot loadings at levels of Mont Belvieu +6¢/USG or slightly lower in a bid to keep volumes flowing, but buyers remained on the sidelines.
Little sign of inventory relief
The weaker netbacks and diminished spot buying interest mean that even if term US buyers manage to continue lifting their contracted volumes, the lack of incremental export demand may leave US stocks in an even worse position than seen at the start of this winter's build season. That was when inventories swelled to 102.4mn bl in late October — the highest levels seen since November of 2015, before the expansion of Enterprise's export terminal at Houston, which provided a much-needed outlet for US supply.
US propane inventories fell to 93.7mn bl the week ended 15 December, leaving US stocks up 7.2pc versus year-ago levels, according to the US EIA. With propane production from natural gas processing averaging 2.6mn b/d through mid-December, well above the highest rate of exports, US stocks are likely to remain above last year's levels throughout the winter heating season.
US propane prices at Mont Belvieu, Texas, averaged 34.7pc of Nymex WTI in November, down from 42.2pc of crude in November of 2022, owing to the ample supply.
The only meaningful relief in the US supply overhang will likely come in 2025, when Enterprise's Houston, Texas, export terminal expansion brings that facility to 883,000 b/d of capacity and Energy Transfer's Nederland, Texas, terminal expands to 730,000 b/d of capacity, adding the equivalent of another 19 VLGC cargoes per month of propane export capacity.
