Bullish gas, LNG prices push European inland refineries to favor LPG as fuel source

Bullish European gas and LNG prices have pushed inland refineries to consider alternative fuels as their main power source with relatively cheap inland propane prices providing strong incentive for gas-to-LPG switching.

Platts, part of S&P Global Commodity Insights, assessed the Northwest European LNG marker for September at $12.397/MMBtu on Aug. 13, with prices rising nearly 7% on the week and nearly 23% on the month.

Platts assessed the NWE propane large cargo market up around 3% on the week and nearly 3% since the start of the month at $598 per metric ton on Aug. 13.

In dollars per metric ton of oil equivalent, the DES NWE LNG was around $478.88/t on Aug. 13, which put it around a $119.12/t discount to propane prices, in Northwest Europe.

While on the cargo side, there is still a relatively wide gap between LNG and LPG prices, inland refineries -- which aren't exposed to the larger cargo prices -- have shared that cheaper inland propane prices have given them strong incentive to burn LPG over natural gas.

Platts assessed the propane the FOB ARA – propane delivered by barges in the Amsterdam-Rotterdam-Antwerp hub – at $520/t.

This put propane barges at a narrower $40/t premium to NWE LNG. While the differential widened day on day, it is still much narrower than the largest discount of $534.81/t seen on Feb. 19, which was the lowest LNG had been versus LPG since Dec. 12, 2012.

With LPG prices becoming more competitive versus gas and LNG, traders have seen refineries keeping their LPG to use a fuel source rather than exporting.

Northwest European LPG small gas carrier exports for August, often considered a market indicator for refinery outflows, stood at 35,300 metric ton on Aug. 14 compared to 47,100 metric ton for the same period in July, Commodities at Sea shipping data showed.

""At this price level we just aren't going to burn any gas, we're going to evaporate as much LPG as possible and I would guess this is the same for similar industries in Germany," a gas trader said. "We had been in the money before this move upwards, quite well in the money, but now we are not.... Flexible industries will just switch; if you can, you will switch. There's no reason to keep burning gas."

"And our industry in particular has issues with heat: if outside temperatures become too high, we are building loads of LPG stocks, so we need to evaporate LPG instead of gas," the gas trader added.

Additionally, with limited demand from gasoline blending for butane or heating for propane over summer, prices for LPG will likely feel more of the bearish brunt than natural gas and LNG.

While geopolitical risks globally have impacted oil and gas markets, analysts at Commodity Insights and traders said that the weak European economic picture has kept the price reaction weaker in oil products compared to gas and LNG.

A tighter global supply picture in LNG has led to further vulnerability to any supply-side and geopolitical shocks, which has led to stronger price hikes comparatively versus LPG.

Several sources added that they were burning LPG over natural gas even when the spreads between the products were wider. Given the significant price increases in gas and LNG recently, the incentive to favor LPG as a main power source has intensified.

"That's right, got some mails from some German [refineries] saying that people shall please pick up or else they have to burn [it]," an LPG trader said. Another trader added that, given the full LPG stocks and relatively lower prices, refineries "might have to burn it, it would be the solution."