Propane discount over naphtha narrows on limited LPG supply

European petrochemicals producers faced tightening cracking margins on elevated naphtha and LPG feedstocks prices. However, as demand remained strong and LPG supply was even more scarce than naphtha, pricing differentials between the two feedstocks narrowed, according to market sources.

Commonly during summer months, propane loses demand for heating which in turn depresses flat prices, motivating petrochemicals producers to maximise utilisation rates against alternative naphtha.

Limited domestic supply of both naphtha and LPG, and additionally limited LPG flows from the US -- commonly supporting substantially European demand -- have led to unusually narrow propane against naphtha discounts.

Specifically, the front-month August propane swap contract closed at a $30/mt discount against the equivalent naphtha contract on July 15, averaging a $34/mt discount for July to-date, compared to an average of $69.53/mt discount for June. In 2020, the average discount stood at $68.49/mt and $44.65/mt for July and June respectively, despite naphtha not enjoying substantial gasoline blending demand, common during summer months.

Pre-pandemic levels in 2019 -- more representative for the spread during regular market conditions -- showed an average of $157.17/mt and $132.74/mt discounts for July and June, respectively.

The supply squeeze in the LPG complex can be further highlighted looking at the levels for the European naphtha crack spreads.

Specifically, as blending demand was strengthening in line with cracking demand for naphtha, the crack spread was trending in the positive territory in the week ended July 10, and several dollars above the season levels as well.

The front-month August naphtha CIF NWE crack spread stood at 45 cents/b on July 15, up from 10 cents/b week on week, averaging flat for July to-date. Equivalently, the crack spread averaged minus $7.68/b during July in 2019.

The US was expected to ship 626,000 mt of LPG to Europe in July, commodity data company Kpler said July 16, up 13% from June.

Despite the uptick in the LPG flows across the Atlantic, the LPG market remains tight and petrochemical demand has outstripped supply.

"Petchems still buying butane in Northwest Europe," a market source said.

However, some market participants have argued the arbitrage has not been as workable as expected in light of high demand and buoyant LPG prices.

"It's tight for butane because of a closed arb [arbitrage] from the US," a second source said.

Ultimately, Asia remains a more attractive destination for US LPG due to the better netbacks compared with Europe, sources have said.