Viewpoint: Exports tighten US propane, weaken arbs

Strong US propane exports during the first half of 2017 tightened US supplies and crushed the arbitrage to Asia, forcing cargo cancellations and spurring concerns about inventory levels heading into the 2017-2018 heating season.

Propane exports hit an all-time high of 1.3mn b/d in late December 2016, according to the Energy Information Administration, just as Enterprise's expanded terminal capacity opened on the Houston Ship Channel. During the first quarter inventories averaged 1.01mn b/d.

But as propane exports flowed into the international market, no longer constrained by domestic infrastructure, prices at Mont Belvieu, Texas, rose. During the first half of 2017, LST propane prices averaged 56.1pc of WTI, up from 47pc of WTI during the first half of 2016.

The higher prices relative to the international market slowed the pace of propane loadings and even led to cancellations in May, June, July and August as the arbitrage to Asia remained poor. The pace of exports slowed to 792,000 b/d, on average, during the second quarter.

With more US propane hitting the international market, US prices began to align themselves more closely to prices in Asia. The Far East Index's premium to US prices on a Houston-Chiba delivered basis narrowed from an average of $37/t during the first quarter to on average a $3/t discount to US prices during the second quarter. The premium of US delivered propane into Asia on a spot fob basis grew as wide as $19/t on 17 May; during May US market participants cancelled at least a dozen June-loading cargoes.

Looking ahead, domestic market participants hope additional cancellations will bolster inventories ahead of the winter heating season. Propane inventories stood at 65.7mn bl the week ended 14 July, according to the EIA, down from 87.4mn bl the same week a year ago.

Several participants estimate inventories will need to build to at least 80mn bl ahead of the heating season to accommodate both steady term exports and domestic heating demand.