Joel Hanley, S&P Global Platts senior director EMEA oil, and Iain Stevenson, managing editor EMEA light ends, discuss this summer's firm propane fundamentals during a time when prices would traditionally drop. Is the alternative steam cracker feedstock about to face an unconventional winter too?
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Northwest European propane prices buck traditional seasonal trends
With Joel Hanley, senior director EMEA oil, and Iain Stevenson, managing editor EMEA light ends
JOEL HANLEY: Hello, and welcome to the Platts Global Oil Markets podcast for the 26th of October, 2017. I'm Joel Hanley. Now, one of the products that we don't focus on enough, in my opinion, on these podcasts is LPG. Obviously, there's butane, but today we're going to look at propane.
Now, propane's a very interesting product that's largely used for petrochemical cracking, of course, and also for heating and cooking in various parts of the world. And, naturally, it's starting to see an increase in its use as a road fuel. We thought we'd follow up this week on an excellent piece by our LPG reporter, Katherine Dunn. She wrote it last week about the interesting trend that we're seeing, or maybe something of an anti-trend, in the propane markets globally.
Now, I'm joined today to talk about this with Iain Stevenson, who is our managing editor for all things light end in London. So, Iain, propane is typically such a seasonal product, year-on-year. What's changed this year, what's going on?
IAIN STEVENSON: Thanks, Joel. Yeah, propane is a highly seasonal product. Typically, spot prices fall during summer when there's no heating demand, and then we see a quite significant rise in winter, once people need to heat their homes and their water and so on.
But, this year, what we've seen is the opposite in fact, and Europe has been limited in its supply for propane, which has meant that prices throughout summer have been, actually, well supported, and that's despite inland heating demand obviously being very weak. So, we've seen well supported prices despite actually quite flat demand.
JOEL HANLEY: And, Europe is largely an import market. Of course, we have a fair amount of production, but is there an arbitrage that isn't quite working, or is there a supply build somewhere that's holding us up?
IAIN STEVENSON: Exactly. So, since 2012, which saw the US shale boom massively inflate its production of field grade gases, the US has been the marginal supplier to Europe. So, as well as our North Sea production, Europe also imports a lot of product from the US Gulf Coast.
But, during this summer, that arbitrage has actually been under pressure and there's two reasons for that really: first of all, staying in the US, their inventories over there have been way below the five year average, and there have been some worries, let's say, that during the winter there wasn't going to be enough product for the US domestic market; and now the second reason is also the fact that more and more of the US Gulf Coast marginal product is being exported straight to Asia, where they also are a big import market for LPG. So, for those two factors, Europe hasn't been receiving as much product as it usually would.
JOEL HANLEY: Alright, now, we say in the piece here, 'winter is coming,' to quote a TV show I've never actually watched, but we head into the winter, whereas you said there's typically a rise in propane prices in Europe, but it might well be that we've already seen the peak of the year, which, to what you were saying earlier about the trend of the lower prices in summer and the higher prices in winter, that would be on its head. I mean, do you think we've already seen the peak this year, and what can re-balance it? Is that going to be the case?
IAIN STEVENSON: Well, that could be the reality to be honest, because I mean, over the past few years we've had very disappointing winters, in terms of inland heating demand in Europe, and if you don't have that pull from the domestic sector, then there's really very little left to support the prices. So, it all depends on something that no one has control over which is the temperature.
So, if we have a mild winter, it may be the fact that prices lose that support and they start to price the cargoes back into the petrochemical pool. But, if we do see a run for products because of cold temperatures during winter, then Europe may find itself even shorter product, and prices would very quickly reflect that.
JOEL HANLEY: So, what effect have this year's strange prices had on the main user of propane, which I suppose is really the petrochemical sector?
IAIN STEVENSON: So, as I said earlier, usually we'd see propane price itself into the petrochemical pool during summer, but this year that just hasn't happened, and actually during the middle of September, we saw the propane-naphtha swap spread, which is a kind of proxy value of propane versus naphtha, reach positive values, which haven't been seen for a very long time.
So, we had propane, actually the marginal feedtock for petchems, pricing above the traditional feedstock which is naphtha. Now, if propane hasn't been providing an alternative, what does that mean? Well, that means petchems have been focusing on that traditional feed, so they've been seeking as much naphtha as they can, and that's had a real bullish impact on that market.
So, at the moment we see naphtha cracks above a dollar; sentiment is bullish for the short-term as well, considering we don't know what winter may bring. So, we've really seen the petrochemical industry fall back on that traditional feed, which actually, has been providing the most economic throughput.
JOEL HANLEY: Excellent. Thanks Iain very much for joining me today, and thank you to you for listening. If you have any more interest in this story or indeed other analysis in the oil and other commodity markets, then do please visit our website Platts.com.