Analysis: End-users fret over rally in Asia LPG prices on strong US Gulf market

Asia's LPG prices rallied to almost seven-year highs in the week of July 5, on strong US markets, a healthy light distillates complex and steady Asian demand, traders said.

The unseasonal high prices, with North Asia in the midst of summer, sparked worries among Southeast Asian end-users, including petrochemical makers who use LPG as alternate feedstock and buyers of end products.

Front cycle CFR North Asia propane jumped to $716/mt July 6, the highest since Nov. 3, 2014 at $721/mt, while CFR North Asia butane rose to $708/mt, the strongest since Nov. 3, 2014 at $712/mt, Platts data showed.

CFR North Asia propane has since declined to $685/mt July 7, while butane fell to $648/mt, along with weaker crude futures.

The last time CFR North Asia prices started a summer rally was from July 12, 2017, at $377.5/mt to peak at $608/mt on Dec. 21, 2017, Platts data showed.

LPG's rally flipped the FEI propane over Mean of Platts Japan naphtha assessments to a rare premium, widening to $8.75/mt July 7, Platts data showed, distancing LPG as substitute

petrochemical feedstock.

End-users also fretted over rising Saudi term Contract Prices that exceeded expectations, with July CPs for propane and butane set at $620/mt, up $90/mt from June for propane and $95/mt higher for butane, the second consecutive monthly increase.

Strong US buying interest

Strong US Gulf Coast propane and butane prices have become the norm, trade sources said. Platts assessed July non-LST normal butane at $1.2325/gal July 7, down 4.25 cents day on day from its

highest since Oct. 3, 2018, when Platts assessed butane at $1.295/gal.

Non-LST propane was assessed at $1.08/gal, down 4 cents day on day from its highest since April 24, 2014. The strength is tied to West Texas Intermediate crude holding above $70/b in the last four weeks,

supporting LPG and natural gasoline.

US LPG production and inventory have been stagnant, or low, amid robust exports. Energy Information Administration data showed propane production at 2.28 million b/d for the week ended June 25 --

the 17th consecutive week above 2 million b/d, and between 2.09 million b/d and 2.37 million b/d.

Propane stocks are amid five consecutive builds, with the June 55.6 million-barrel average roughly 14.7 million barrels below the June 2020 average.

Propane exports averaged 1.18 million b/d in June, in line with the previous five-month average.

Low stocks, strong exports and leveling production have kept spot propane strong, as buying interest remains high in anticipation of a potential inventory shortage this winter.

Pointing to domestic demand, one source said: "Earlier in the year, C3 (propane) and C4 (butane) were preferred over C2 (ethane) for cracking, especially C4. So (both) picked up a lot of demand."

Trade sources and S&P Global Platts Analytics do not see these dynamics changing soon. Propane swaps have shown a decline in September, but one source does not anticipate that trend continuing

as summer months near an end.

"I can't explain that," the source said. "The only way that'd make any sense to me is if the higher C3 price results in lower exports and so higher inventory, allowing prices to dip briefly before winter

demand pushes price back up again. But I wouldn't expect traders to sell lower in September when they expect prices to go right back up in October."

There was talk that demand for C5 (natural gasoline) might be supported by the global petrochemical sector because of costly propane, but that has yet to be seen fully.

Even C2 is above 30 cents/gal -- assessed at 30.125 cents/gal July 7 -- for the first time since February 2019.

Several sources said Enterprise Product Partners is buying back propane cargoes to help customers who are considering cancellations. Platts assessed FOB propane cargoes at plus 4.50 cents/gal over cavern product.

Chinese, Indian demand

Demand from state-run Bharat Petroleum Corp. Ltd.'s tender for 2022, flagged early on India's recovering appetite, looks to secure almost 2 million mt of term mixed LPG supply amid hopes of a return to normalcy post-COVID.

While this surpassed BPCL's term tender for 800,000 mt of supply for this year, the company has been buying spot cargoes regularly to cover shortfalls.

"Maybe they are trying to term up more," one trader said, echoing views from another source that higher term volumes could limit the ratio of spot imports next year.

Chinese demand for propane dehydrogenation plants remain healthy despite softening margins amid steady downstream requirements and the June average operating rates had been expected to rise

after maintenance, market sources said.

The trade source cautioned that demand could slow as some PDH plants shut, such as Zhejiang Satellite which is undergoing maintenance.

Wanhua Chemical is slated to shut its PDH plant in September for 30-45 days of maintenance, he added.

Middle East supply is ample, with Qatar Petroleum accepting August term nominations without cuts and delays, and issuing a spot tender offering 45,000 mt of propane for Aug. 12-13.

ADNOC's and Saudi Aramco's August acceptances -- due between July 12 and 18 -- will depend on the producers resolving the OPEC stalemate on raising crude output by 400,000 b/d each month from August to December.

But after Aramco canceled up to five cargoes in July term LPG acceptances, following the Ras Tanura oil and gas complex outage, sources expect August volumes to improve with exports at around 600,000 mt, after refinery operations resumed.