NWE prices to come under atypical winter pressure

Record-high US imports have helped to keep European stocks plentiful this summer, but a shift in the weather could hamper the market, writes Efcharis Sgourou

Northwest European propane prices could divert from seasonal patterns and fall this winter as a result of ample stocks built during this summer as well as the possible ramifications of a global recession.

European inventories are bountiful after record-high imports from the US this summer. Propane stocks in the US this month have also risen to about 10pc higher than they stood a year earlier on limited domestic and export demand. The bearish sentiment in northwest Europe is illustrated by the forward propane curve, where the January 2023 cif ARA swap is trading at a $1.50/t discount to its front-month September equivalent, in a highly anomalous backwardated structure that reflects recession fears as the region approaches winter.

Propane large cargo prices at the Amsterdam-Rotterdam-Antwerp (ARA) hub have lost ground to crude in the third quarter, falling to about 82pc compared with 96pc in the second quarter and 109pc in July-September 2021. This coincides with a surge in buying early in the summer from the US, reflecting anxiety to stockpile before winter owing to supply concerns fomented by the war in Ukraine. But scant demand in the past couple of months has resulted in a drop in US arrivals. Only 463,500t are due to be delivered this month, compared with about 475,000t in August and more than 877,000t in July, Argus data show. Spot trade has dried up, with most of these US imports under term contracts.

Naphtha prices have fallen to 13-month lows this month on ample supply and tumbling crude levels, pushing forward propane prices to premiums to naphtha from September to December — something that has become less frequent in Europe over the past 10 years as US propane exports have surged. The spread between the two feedstocks has fluctuated in recent weeks, but the absence of a predictable discount for propane has removed any petrochemical buying interest.

Some early weather forecasts suggest temperatures could fall below averages in Europe this winter, meaning heating demand could firm and support prices.

Propane is still cheaper than natural gas and the region's refineries continue to consume their surplus LPG as fuel. Refineries have historically satisfied about 75pc of Europe's LPG needs, and cuts to Russian gas imports this winter should continue to curtail availability and support prices. Upstream producers are also leaving raw natural gas liquids in their natural gas streams owing to the price discrepancy, further reducing supplies. Norway's LPG exports fell by 50pc on the year to less than 1mn t in the third quarter, data from oil analytics firm Vortexa show.

Ahead of the curve

Northwest Europe can turn to the US to plug these shortfalls but it is limited by the import bottleneck at the ARA hub that feeds the inland market. It will also face rising competition from the US' main importing region, Asia-Pacific. But demand in Asia has been weak in recent months, largely owing to reduced petrochemical consumption. The forward curve for propane deliveries to northeast Asia is only in a small contango — prompt prices at a premium — in September-October and flat in November-December, resisting seasonal norms, before shifting to a steep backwardation for the first six months of 2023. The key Chinese market continues to be affected by the Covid-19 pandemic owing to the government's strict policy on any outbreaks, further weighing on its demand.

The cif ARA propane curve has a similar structure — flat in the front two months, a small November-December contango, shifting into backwardation in January-June 2023. This hints at little concern over the supply-demand balance. The panic buying over the summer stimulated by the Ukraine war and fears of a looming recession has shifted the winter outlook to a more bearish one. Supplies appear to be sufficient, with only an unexpected shift in the weather likely to destabilise the market.

Propane cif ARA forward curve

US LPG exports to NWE