ANALYSIS: Asian butane gets support from US demand for winter gasoline blending

Asia's propane premium over butane reached a near four-month low at $2/mt on Jan. 13, narrowing from $30/mt when the January Saudi term contract prices were set, as butane in the region tracks higher prices in the US, where the product is in demand as a winter gasoline blending feedstock, traders said.

The premium of propane over butane widened slightly to $3/mt at the Jan. 14 close.

Butane prices in Europe also rose at the onset of the US winter season on petrochemical industry demand for butane to produce plastic products for the medical sector during the COVID-19 pandemic.

This led to narrower blending margins of reformulated blend stock for oxygenate blending and conventional blend stock for oxygenate blending exported to the US Atlantic Coast, perpetuating low inventories. However, butane remained cheaper in the Atlantic Coast region than in Europe, encouraging blending in the US East Coast areas, Atlantic Coast sources said.

With rising domestic demand, butane cargoes arriving into Asia from the US are estimated at around 300,000 mt in February, down from 530,000 mt from the US in October, trade sources said.

In contrast, propane cargoes arriving from the US to Asia are forecast at around 2.3 million mt in February, the highest since February 2021, pointing to improving supply of propane to meet healthy demand in China. This also helped to narrow the premium of propane to butane in Asia.

The spread was last narrower on Sept. 14, 2021 at parity, S&P Global Platts data showed.

The spread between CFR North Asia propane and CFR North Asia butane averaged plus $12.5/mt over Jan. 1-14, narrowing by $16.04/mt from December when it averaged plus $28.55/mt.

CFR North Asia propane was assessed at $775.50/mt at the Jan. 14 close, down $11/mt from the previous session, Platts data shows.

CFR North Asia butane was assessed Jan. 14 at $772.50/mt , down $12/mt on the day. But butane prices rose $68.13/mt from an average of $689.02/mt over Dec. 1-31 to $757.15/mt over Jan. 1-14,

Platts data shows.

As Asia's butane market strengthens, brokers expect its price to flip to a small premium against propane in February. Butane was last higher than propane on Sept. 8, when it was assessed at

a premium of $4/mt over propane, Platts data shows.

High US butane prices

The margin between butane and propane held at 130% for a second consecutive assessment after Platts assessed non-LST propane at $1.17/gal based on a standing bid during the Platts Market

on Close assessment process on Jan. 13. Butane has averaged 132% of propane for January barrels after averaging 123% against propane in December.

However, butane as an alternate gasoline blending feedstock in the US currently remains cheaper than naphtha, trade sources said.

One trade source said iso-grade butane, a cousin of butane that burns more cleanly, is sometimes favored over refinery-grade butane, which consists of butane and propane or gasoline, as a feedstock for winter-gasoline blending. This is because isobutane is of higher quality.

The premium of ref-grade butane to Iso-grade butane has also narrowed in recent weeks, with ref-grade butane mostly holding to an average premium of 5.125 cents/gallon over Iso-grade butane for a 14-day assessment period prior to Dec. 30, 2021.

However, this premium narrowed to 2 cents/gallon on Jan. 4, and has since averaged that price for the last eight assessments, last assessed at 2.38 cents/gallon on Jan. 13, Platts data showed.

The narrowing of the premium between ref-grade butane and Iso-grade butane suggests butane is now in demand as a feedstock for gasoline blending.

Another trade source said US butane prices are being spurred by European demand. This was largely due to the high cost of natural gas in Europe, which has increased the BTU value, pushing up butane prices.

"In these strange times of super expensive natural gas in Europe, I expect sheer BTU value is what's pulling normal butane prices so high there," the source said, adding that US butane prices might also be affected by demand for butane as a gasoline blending feedstock.

Expected Indian demand

Trade sources said US demand for butane as a gasoline blending feedstock is expected to ease from mid-April as warmer weather arrives, when butane is less viable as a gasoline blendstock due to its low vaporization temperature.

Trade sources said the US would typically increase butane exports during this period as domestic demand wanes.

As butane supply is expected to recover in the second quarter, trade sources said India, a key buyer of mixed propane-butane cargoes, may see higher demand for butane during the upcoming regional election period, with some political candidates offer LPG handouts and subsidies.

Punjab Congress chief Navjot Singh Sidhu has promised eight free LPG cylinders to each female homemaker ahead of the February Punjab assembly elections, local media reported.

India's LPG demand is forecast to grow by 1.93% to just above 28 million mt in 2022, according to S&P Global Platts Analytics.