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Analysis: Higher supply pressures Middle East LPG prices as Chinese demand grows

Highlights

Middle East LPG supply to rise 37 mil-40 mil mt 2021-2022

Saudi Aramco Contract Prices on a downtrend after recent increases

Chinese petrochemical sector's LPG demand to grow 3.5 mil mt 2021: Platts Analytics

Singapore — Asia is bracing for higher Middle East LPG supply, as Saudi Arabia unwinds its voluntary 1 million b/d in extra crude production cuts over May through July, while US-Iran indirect talks over restoring the nuclear deal boost hopes of sanctions relief that could see restrictions on Iran oil sales lifted.

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With more spot supplies from Kuwait and Qatar, and US loadings resuming after winter disruptions, Asian consumers are getting lower prices even as Chinese petrochemical demand is growing, trade sources and analysts said.

Qatar had also accepted term nominations for at least February through May loadings without cuts or delays, helping to fill the gap from cuts or deferments to Saudi term exports.

With ADNOC's announcement for May due the week of April 12, followed by Saudi Aramco's by April 20, traders expect acceptances to be in line with nominations amid OPEC's decision to add production over May through July. ADNOC kept February, March and April acceptances consistent with nominations.

While concerns persisted over tight Saudi propane supply as domestic petrochemical makers absorb feedstock, higher production would help offset that deficit, sources said.

Increasing supply and tepid demand from India and Indonesia in recent months has already pressured the Saudi term Contract Prices.

LOWER SAUDI MAY TERM CPS EXPECTED

Saudi Aramco set April propane CP at $560/mt, down $65/mt from March, the first month-on-month fall after nine-straight months of increases, while butane CP was at $530/mt, also down $65/mt, the first decline after eight rises in a row.

The downtrend is expected to persist, judging from the front-month May CP swap, valued at $509/mt on April 8, $51/mt under the April term CP, while butane was at $492/mt, $38/mt below April CP.

FACTS Global Energy expects Middle East LPG supply in 2021 to exceed 3 million mt, but under 4 million mt, over and above 2020 volumes, making for total projected exports of nearly 40 million mt. Trade sources, on the other hand, estimate Middle East exports at 37 million mt to 38 million mt.

S&P Global Platts Analytics expect Middle East LPG exports to grow about 4.5% this year to slightly above 37 million mt, and by another 6% to 39 million mt in 2022.

"Marginal growth is seen from associated gas supply this year with greater increase coming from non-associated supply," Platts Analytics said.

Kuwait Petroleum Corp. has recently sold two 44,000 mt evenly split cargoes for end-April to early May loading. Before that, it sold three 44,000 mt, evenly-split cargoes for loadings over April, May and June.

IRANIAN EXPORTS

Iranian shipments have also been rising. FGE estimates eight to 10 cargoes shipped for April-May, seven in March, and three to four cargoes each month in the second-half of last year.

Traders said these might include term volumes with Asian buyers bound for China.

At its peak, Iran exported 15 LPG cargoes/month, before the Trump administration exited the Joint Comprehensive Plan of Action in mid-2018 leading to sanctions that virtually halted Iranian exports.

FGE said the spot supply increase for April and higher Middle Eastern exports could be driven by suppliers clearing stocks ahead of term negotiations.

KPC's fifth gas train is also expected to add 440,000 mt/year of supplies, or nine to 10 cargoes/year, in Q2 2021, FGE said. But a trade source said in order to maximize the train's production, it must be fed with more upstream supply.

FGE also noted that Qatar's Barzan Gas Project with annual production of 400,000 mt, more than compensated for the shortfall following the brief shutdown at Ras Laffan in March. The increase from Barzan and the return of a splitter, led to higher spot availability and FGE expects April exports to jump to more than 900,000 mt.

Platts Analytics said the roll back of OPEC+ production cuts "would be a welcome relief to the Asian LPG market, that could ease some of the near-term tightness", resulting from the late-February deep freeze in Texas, which led to heavy stock draws to meet domestic demand amid persistent calls on the US Gulf Coast exports pressuring US and Asian LPG prices in March.

"With US stocks hovering at historic lows at 39 million barrels on March 26, about 20 million barrels lower on-year, stock replenishment amid slower rebound in US production and healthy Asian demand would likely flatten the LPG price curve through summer," Platts Analytics said.

Middle East and US export growth would be met by rising Chinese petrochemical demand, with the start up of propane dehydrogenation plants and higher base level steam cracking of LPG.

S&P Global Platts Analytics expects the Chinese petrochemical sector's LPG demand to grow by about 3.5 million mt in 2021, though rising domestic output from refineries would likely limit the deficit to 2 million mt.