FEATURE: Supply disruptions converge to push European butane to multi-year highs

New York — Western Mediterranean butane has soared to multi-year pricing highs as constrained supply and high demand converge to squeeze the market to a point where the tightness has spread into Northwest Europe, West Africa and the Eastern Mediterranean.

S&P Global Platts assessed benchmark FOB West Med Butane, basis Lavera, France, at $601/mt Thursday. The market has jumped 24% since January 8, 2020, when it was assessed $484/mt and is at its highest value since October 2018. Northwest Europe butane coasters, also commonly bought to fill Mediterranean and African shorts, have seen a similar rise, with benchmark FOB NWE Butane assessed at $559/mt Thursday, up from $476/mt January 8 and also the highest level since October 2018.

The pricing environment is even more stark when you compare butane pricing to Platts benchmark naphtha assessment -- which is often used as a trading and hedging mechanism for comparatively illiquid butane. West Med butane was assessed at 125% of naphtha Thursday, its highest premium since February 2016. FOB NWE Butane was assessed at 116% of naphtha Thursday, the highest premium since November 2010.

"Spot demand is up and the West Med is dry, hence why we're seeing elevated values in North Europe," a butane broker said. "Many natural West Med buyers have been forced to search further afield."

Still, the prices could in reality be even higher, sources said, as a lack of market liquidity due to lack of butane has left traders unsure of where the pricing ceiling really is.

"At the moment, I think nothing is too high," a butane trader said. "You'll probably get struck by lightning before you find tons in the Med."

The butane market has been battered by a series of supply disruptions, notably in France, where operations at refineries and ports have been disrupted since trade unions called a general strike in late November 2019. Market sources have been mixed on how much the strikes have hindered butane loadings out of the Mediterranean port of Lavera, but they have all agreed these French disruptions are one of the largest, if not the most significant factor, to the recent high price environment.

Asian demand

The other major supply disruption has been strong demand for butane in Asia, which caused US Gulf Coast tons that would normally arrive in Europe to bypass the region to find more lucrative prices in the East. Market sources previously estimated 2.6 million mt of combined US butane and propane would move from the US to Asia in January, and 2.8 million mt in February -- up from a typical monthly average of around 1.7 million mt in 2019.

"It's a serious issue for us," a second butane trader said. "We need tons and cannot find them."

A handful of other factors are also combining to constrict supply. The Eastern Mediterranean has been left short butane due to Middle East refinery turnarounds and Libyan political unrest, sources said. A third trader said lower refinery runs are also partly to blame.

"Refineries are showing less year on year, I think, because FCC margins are so slim and FCCs make lots of butane," the trader said.

While supply has dried up, demand has remained strong, sources said, adding that several companies are struggling to meet commitments. Morocco, Tunisia and West Africa are specifically driving prompt demand, sources said.

"I'm seeing an exceptionally tight market -- it's getting slightly concerning," the third trader said. "I haven't been able to get an offer all day in Europe and am seeing multiple requirements that are unmet."

Another factor which could be driving spot prices higher could be the backwardated West Med market. With future prices weaker, suppliers might have waited to fulfil commitments until they were surprised by the series of disruptions.

"I think too many people [were] left [buying] too late because the market was in backwardation, so people thought they would be able to buy cheaper closer to the date," the first source said. "And then the fog came in the US, strikes in Lavera, a strong Far East program and suddenly, the tons were no longer there."

As for when the market will rebalance, sources said US tons won't arrive until mid-March at the earliest.

"There will be some people very unhappy in the next three-to-four weeks for sure," the first source said.