Analysis: OPEC+ oil cuts fail to stem widening discount for FOB Arab Gulf propane differentials

Singapore — Asian LPG importers, especially Indian and Chinese end-users, preferring cheaper US cargoes on the delivered market has widened the discount of FOB Arab Gulf propane cash differentials against front-month Saudi Aramco contract price swaps, brushing aside a tight Middle East market on OPEC+ oil cuts.

A supply-led pull on Middle East LPG production would typically see FOB AG cash differentials strengthen as Asian end-users compete to secure limited spot supply. However, more competitively priced US cargoes widened the differential to minus high-teens/mt in the week started July 5, S&P Global Platts data showed.

The FOB AG cash differential, which has been at a discount to front month CP swaps since April 30, widened to minus $16/mt on July 7, Platts data showed. The was also in line with steep discounts seen for delivered cargoes in the CFR market, with the Platts CFR North Asia propane differential against August propane CP swap dipping to minus $24/mt over the same period.

Upstream, the Middle Eastern crude market has seen support from a 9.7 million b/d production cut by OPEC+ alliance aimed at cushioning the oil market from the demand destruction caused by the coronavirus pandemic.

The latest round of June 6 cuts are set to run through July and then scale back to 7.7 million b/d through the rest of the year. This has reduced the volume of LPG produced from associated crude extraction in the region, said sources.

Aramco surprises with higher July CP

Higher contract prices by Saudi Aramco also weighed on demand.

Reduced supply could have contributed to Saudi Aramco announcing an increase in its July propane and butane contract prices by $10/mt each from June at $360/mt and $340/mt, respectively, which came against market expectations, said traders.

"There is less pressure for Saudi Aramco to export given the extension of the OPEC+ cuts into July," said a China-based LPG buyer.

"FOB sellers were already quoting July loading cargoes at CP minus high-teens/mt discounts, so it is strange that [Saudi Aramco] has raised July CPs," a Singapore-based trader said.

Saudi Aramco had last month announced acceptances of July term LPG nominations with limited cancellations and delays, but had canceled or deferred up to 10 cargoes for June loading, due to a mix of demand loss from term lifters and production cuts.

"For July, we heard [at least] five or six cargoes less than usual monthly nominations," said a trader.

Buyers turn away from AG market

The effects of the hike in July Aramco CPs also rippled across other Middle Eastern producers and Asian end-users, market sources said.

Kuwait Petroleum Co. in the week ended July 4 canceled a spot tender offering 44,000 mt of mixed LPG, comprising 33,000 mt of propane and 11,000 mt of butane, for Aug. 1-2 loading, as bids received were "a lot lower than expectations."

A source close to the company said bids received languished in the low- to mid-$20s/mt discount to the Aramco CP. The company has no plans to reissue the tender due to unfavorable FOB Arab Gulf pricing and reduced production volume for July.

"We will keep the cargo in storage for the time-being, there is little inventory pressure," the source added.

Over in Qatar, however, Qatar Petroleum for the Sale of Petroleum Products, or QPSPP, will be pressured to offload some spot volumes at steep discounts for July-August loading, sources said.

Unlike other Middle Eastern LPG producers, Qatar's export volumes was not expected to have been reduced from crude production cuts, as its LPG is mainly produced from gas plants, said participants.

QPSPP was last heard to have sold a 44,000-mt propane cargo for July 27-28 loading, at an unknown discount to Aramco July CP, FOB basis. Traders have said the discount was likely to have been in the high-teens/mt, although this could not be confirmed.

Traders also pointed out that term LPG nominations for August-loading cargoes from QPSPP were mostly for second-half August loading, as end-users try to leverage on the current $12/mt contango between H1 August and H1 September in the CFR North Asia market. This could in turn pressure QPSPP to offer more spot tenders for H1 August loading to relieve some inventory pressure, according to participants.

Another interesting development has been that of Indonesia's Pertamina issuing its last two spot buy tenders for July and August delivery on a fixed price basis, a change from the company's previous tenders that were awarded basis Saudi Aramco's CP, Platts reported earlier. The company has also included the option to offer on an FOB US port basis for sellers in these two tenders.

"AG-origin LPG is not price competitive at the moment compared to US cargoes, and we will stick to buying LPG on flat price basis for now," a source close to the company said in the week started July 5.

"FOB AG discounts need to consider the price which end-users are paying for US material at the moment," said a China-based propane dehydrogenation plant operator in the week started July 5.

"In fact, I will not be surprised if FOB AG cash differentials head towards high-$20s/mt discounts to [August] CP given the large price inversion between FOB and CFR currently. Cargoes from the West are abundant," the source added.