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Highlights

US LPG arrivals estimated to fall to 2 mil mt in July

Higher volume of US propane to be retained in the west

Widening propane-naphtha spread encourages feedstock switching

Singapore — US LPG heading to Asia is estimated to fall to around 2 million mt in July, down from a high of around 2.8 million mt in June, but still higher than the monthly average shipments of around 1.7 million mt in 2019, as more US propane is expected to be retained in the west given the firming naphtha-propane spreads recently. The bulk of which, is expected to head to Europe, industry sources told S&P Global Platts.

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The fall in western arrivals into Asia for July is expected despite the widening of the West-to-East arbitrage window in recent weeks. The spread between the CFR North Asia propane marker for delivery 45-60 days forward and the FOB US Gulf Coast propane cargo marker plus freight for 44,000 mt shipments from Houston to Japan has been climbing steadily and flipping into positive terrain since it slumped to a more than four-week low of minus $23.80/mt on June 12, Platts data showed.

With the CFR North Asia propane market locked in a contango, market sources opined that it remains economical to bring western LPG to Asia for July, leveraging on low terminal fees -- which include fees to transport the cargo from Mont Belvieu to the dock, refrigeration fees and dock space -- in the US Gulf Coast.

Platts had assessed the H2 July/H1 August North Asia propane spread at minus $4/mt on June 25, narrowing from the $5/mt contango the previous session.

"[With terminal fees] at 4 cents/gal to 4.5 cents/gal, it is still okay to bring US volumes to Asia," a Singapore-based trader said.

The FOB USGC propane cargo premium to cavern product for 44,000 mt shipments loading 30-45 days forward is currently standing at 4.75 cents/gal -- higher than around 3.75-4 cents/gal in May -- but below the 7 cents/gal peak in mid-April.

Freight rates on Very Large Gas Carriers plying the Gulf Coast and the Far East have also continued to fall steadily over the past month amid greater tonnage availability. Platts had assessed the VLGC freight for the Houston to Japan route at an average of $53.42/mt in June, after hitting the previous high of $102/mt on April 20.

West to East arbitrage flips back to positive

US LPG EXPORTS TO EUROPE TO INCREASE

There has been heavy pressure on the US to export LPG in recent weeks amid a stark decline in demand due to the slowdown in economic activity from the ongoing coronavirus pandemic, coupled with the seasonal lull in summer heating demand.

Propane product supplied, or implied demand, in the country, tumbled 372,000 b/d, or 34.7% week on week, to 701,000 b/d in the week ended June 19, the second-lowest mark year-to-date. Propane demand stood at 589,000 b/d in the week ended May 29, according to Energy Information Administration data released June 24.

Propane exports from the US increased 433,000 b/d to 1.18 million b/d, a 58% week-on-week build, according to the EIA.

According to S&P Global Platts Analytics, 11 VLGCs loaded from US ports in the week ended June 19, the same number as the prior week. Seven carriers were destined for Asia, including four bound for Japan and two for South Korea.

"However, more cargoes will be retained in the West because of the widened propane-naphtha spread in Europe," a Singapore-based trader said this week.

Europe's LPG demand, particularly for propane in Northwest Europe, is increasing as petrochemical crackers turn to propane as a feedstock because of its substantial discount to naphtha, market sources said.

The propane CIF NWE large cargo marker was assessed at an $83.75/mt discount to CIF NWE naphtha on June 25. Typically, propane needs to be at a discount of at least $60/mt to naphtha before petrochemical crackers would consider switching to using more propane.

On the other side of the Pacific, the Asian LPG market is similarly displaying signs of recovery with gradual buying interest emerging on expectations of a recovery in petrochemical demand after the recent weakness. A tight Asian naphtha market and the widening propane discount to naphtha could also prompt Asian steam crackers to partially switch to LPG as an alternate feedstock going forward, market sources said.

Platts had assessed CFR North Asia propane cargo at $317.50/mt on June 25, down $16/mt on the day, while FOB US Gulf Coast propane cargo loading 30-45 days forward was assessed at 52.88 cents/gal, down 87 cents/gal on the day.