US LNG, LPG arb economics narrow on ample supply, export delays

Despite diverging fundamentals in European LNG and LPG markets, US arbitrage economics for both have narrowed as export logistics and abundant supply weigh on sentiment.

US prices remain elevated on strong domestic heating demand as peak heating season comes into play. Meanwhile, logistical constraints and productions dips due to extreme temperatures could see exports fluctuate week to week, bucking the resiliency of US exports seen last year, according to S&P Global Commodity Insights analysts.

Data from S&P Global and LPG sources have suggested the propane arbitrage into Northwest Europe from the US has become uneconomical, taking into account freight costs and selling a US LPG cargo into Northwest Europe.

Platts assessed the propane US to Northwest Europe arbitrage at minus $70/mt, S&P Global data showed.

Propane CIF large cargoes were assessed at $511.50/mt, up $26.75 on the week to be at a $61.82/mt premium to US prices and a $61.50/mt discount to prices seen in Asia.

Despite European freight rates falling, high overall price points have kept arbitrage economics thin.

"Whispers of potential February propane cargo cancellations are beginning to make the rounds in the US export market again in response to surging US propane prices," analysts at S&P Global Commodity Insights said.

"January propane exports are expected to be robust when compared with the stable, yet elevated trend of the fourth quarter of 2023."

January exports should remain above 1.7 million b/d but February export expectations could wobble, according to the analysts.

Arbitrage economics of selling US LNG cargoes into Asia over Europe have been in negative territory since Jan. 3 but have predominantly been negative since September.

High inventories and relatively weak demand in both Europe and Asia, as well as ample production out of the US have worked in tandem to pressure prices downwards and narrow arbitrage economics.

The Platts LNG DES Northwest Europe Marker for March was assessed at $8.676/MMBtu on Jan. 16, down 19.8 cents/MMBtu on the day. Platts assessed the March JKM at $9.804/MMBtu, down 54.4 cents/MMBtu.

For a very prompt cargo loading from the US Gulf Coast -- when considering freight differences and an H1 March delivery date to Asia amid longer shipping -- delivery to the Japan-South Korea-Taiwan-China hub would command a discount of around 76.4 cents/MMBtu over selling into Europe in H2 February. That takes into consideration taking a US cargo to Asia through the Cape of Good Hope.

US export logistics

Although US LNG and LPG exports remain healthy amid strong production, arbitrage economics have been worn away by lower than expected demand and sellers taking longer voyages amid delays at the Panama Canal and ongoing tensions in the Red Sea.

While ample vessel availability and narrow arbitrages have cushioned freight rates, vessel availability could narrow in the near-term as sellers take the longer routes to deliver tons to Asia. Both LPG and LNG vessels have been looking to use the Cape of Good Hope or Suez Canal option as alternate routes. Alternatively, LPG and LNG vessels can wait until a next slot opens up at the Panama Canal or pay a large fee to jump the line.

"The geopolitical tension in the Middle East that led to multiple attacks on merchant ships made the LPG shipping industry reevaluate their available options, after which many dropped the Suez card amid elevated risk of attacks and an increase in insurance premium sailing through the Red Sea area," Charles Kim, senior principal research analyst at S&P Global, said.

"The Cape of Good Hope option comes with low risk and predictability in loading and discharging time, benefits that options via both canals do not currently offer, but this eventually increases the overall transportation costs because of the longer travel distance required on a round-trip basis."

Kim said that looking into the detailed data by segment, however, offered a different view as the LPG segment transit count has begun to rebound, currently hovering at 1.8 (up 0.2 month on month) for Panamax locks and 1.9 (up 0.4 month on month) for Neopanamax locks as other major segments including container and LNG ships continued to indicate reduction in daily traffic counts from the previous month.

It was worth noting, Kim said, that no LNG ship transit via the Panama Canal was observed at all so far this month, while the ship segment's daily transit record stood at 0.6 in November and December last year.