Northwest European propane prices will remain firm far into the first half of next year, even without the fillip of above average domestic heating demand.
Support comes from ongoing lack of imports from the key global supply hub, the US Gulf Coast (USGC). This has capped northwest European propane availability for most of 2017. And the export of local production to the strong Asian markets that are also dragging USGC cargoes east continues to exacerbate the impact of declining cross-Atlantic supply.
Asian buyers have been offering USGC sellers premiums of around $40-50/t for month 2 deliveries compared with prices of month 1 deliveries in northwest Europe since mid-September, peaking near $60/t in mid-October. This is significantly higher than the $25/t premium recorded on average during the same period last year. The higher premium, which naturally prompts US sellers to send cargoes to Asia-Pacific, is set to remain constant in the first half of 2018, supported by continued strong Asian demand.
The resultant tightness has supported northwest European propane value above parity to Atlantic Basin crude benchmark North Sea Dated for 111 consecutive trading days, starting 11 July. This marks the longest sustained propane premium in over six years. Year to date, the premium has been in place on some 167trading days, considerably more than the 124 instances seen across 2014-2016.
The northwest European market also competes with the Mediterranean region to attract US cargoes, and competition is set to persist and deepen in 2018, adding further support to prices across the first half.
Morocco, Tunisia and Egypt, where LPG consumption is forecast to increase cumulatively by an average of 3pc in 2018 year on year, adding 100,000t of additional LPG demand in 2018, are highly reliant on imports to cover their needs. And, on the northern coast, Turkish imports from the US alone increased by 36pc on the year in 2016 to 382,000t, and have already hit some 416,000t across January-September 2017.
This demand will likely divert multiple Very Large Gas Carriers (VLGCs) from the USGC that would otherwise go to northwest Europe, especially if the price premium offered by southern buyers in winter 2018 repeats the trend of previous years when it widened to around $16/t in the first quarter, compared with just $3/t in 2015 and 2016, giving a strong incentive for US sellers to sell into the Mediterranean. The Mediterranean price premium to northwest Europe stood at $9/t on 12 December.
Recently, higher prices for cargoes delivered into northwest Europe have been enough to lure some ex-USGC imports. The VLGCs the Providence and the Crystal Marine delivered over 90,000t into Flushing in the Netherlands mid-December. But this relative trickle of USGC supply is not expected to endure, or to escalate. It is a one-off to satisfy an acute mid-December demand spike from local traders. Consequently, propane prices are expected to retain significant premiums to crude over the winter. Relative strength may wane marginally from the 120pc plus level, but premiums are set to remain intact far into 2018.
This is despite the weakness of expected heating demand, as indicated by current long term weather forecasts. The widely-used European Commission European Centre for Medium-Range Weather Forecasts (ECMWF) forecasts indicate above average temperatures across northwest Europe in the first quarter of 2018.
Key downstream demand regions across northwest Europe — most notably Germany — have already seen reduced heating demand for propane in 2017 after mild autumn temperatures. And this was not helped by downstream buyers having relatively well-stocked tanks throughout the year following a longer winter 2016-2017 and a cold snap in spring 2017.
According to data from EU statistics agency Eurostat, German propane imports from Belgium and the Netherlands hit a three-year high in the spring, with March 2017 totalling close to 160,000t, compared with 130,000t in March 2016 and 126,000t in March 2015.
Even looking at the October-March period over the last three winters, this averages 132,000t per month in 2016-2017, compared with 116,000t the previous winter and 109,000t the winter before that.
Whilst appetite will pick up from the downstream market as colder weather sees home heating switched on throughout the day, the question is when sufficient demand to induce spot cargo purchases will materialise.
In addition to this lower demand from traditional downstream buyers for spot tonnes from the Amsterdam-Rotterdam-Antwerp (ARA) trading hub, the situation is exacerbated by the ARA fca premium to daf Brest prices for propane delivered to the Polish-Belarusian border, which has incentivised eastern European and some German buyers to procure products from Russia rather than the usual ARA distributors.
From the start of September 2017 through to the end of November, the fca ARA premium to daf Brest propane averaged over $100/t, compared with a discount of $30/t for the same period a year earlier.
Reduced propane availability in northwest Europe because of the lack of US supply was a major factor behind the yawning daf Brest discount. LPG production and exports from Russia decreased in the January-September 2017 period, resulting in higher output and market corrections later in the year and hence lower pricing.
Because of short US supply and cargoes heading south to the Mediterranean, the weaker downstream heating consumption that is set to emerge will still prove sufficient to keep demand from the petrochemical sector subdued until the end of winter.
Regional supply is tight enough for heating demand to still be enough to support propane prices to a slim discount of under $20/t to naphtha until the end of February, sufficiently narrow to keep propane at a less favourable level than naphtha for steam cracking economics.
The forecast strength of propane prices relative to naphtha throughout the winter is already priced into forward propane-naphtha spreads in the swaps market. From December to February, spreads are at a mild discounts of just under $20/t. First-quarter propane swaps are currently discussed at $539/t, or just $25/t lower than their naphtha counterparts.
Further out, as propane demand for heating subsides at the end of winter, the propane-naphtha discount widens to around $40/t in March paper and some $65/t in April. The discount is indicated at $68/t in the second quarter, with propane swaps down at $476/t in the wake of the vanished domestic heating demand.
As propane turns less and less expensive compared with naphtha, it will become a more competitive feedstock in the petrochemical cracking mix, which it will have opportunities to re-enter from April onwards when propane swaps decrease to under 90pc of naphtha paper.
The petrochemical industry is the largest buying sector for LPG in northwest Europe and will account for a forecast 37pc of total consumption in 2017, equivalent to 14.6mn t. Argus forecasts that by 2020 this will rise to 39pc and 15.85mn t and hit 42pc and 16.92mn t in 2025.
Looking long term, the composition of feedstock slates is set to be altered by the anticipated growth in the use of cheaper US shale gas-derived tonnes now entering the global market. Despite this eating into propane's potential feedstock market share, the shift will instead, and counter-intuitively, increase propane demand from the petrochemical sector in northwest Europe.
A lack of co-products derived from ethane under steam cracking will push Europe's prevailing structural shortage of propylene even shorter. And the increased propane demand will arise from planned propane dehydrogenation (PDH) units across the region to address this imbalance where the co-product is produced directly from propane.
Austria-based Borealis is planning a large capacity upgrade to its current 480,000 t/yr Kallo PDH plant with a scheduled operational start date of early 2022 that will potentially increase propane feedstock consumption by over 850,000 t/yr. UK-based refiner and petrochemicals firm Ineos is building a 750,000 t/yr unit most likely in Antwerp with production scheduled to come online in 2021. And Poland's state-controlled Grupa Azoty is planning a 400,000 t/yr plant and new port terminal with storage for imports of LPG in Police, near Szczecin, in northwest Poland.
The primary driver of flat propane price remains global crude oil fluctuations, chiefly that of Atlantic basis benchmark North Sea Dated.
The early-November rally to a two-year high of over $64/bl, was largely a result of confidence that the global rebalancing process is well under way and that there remains sustained determination by key Opec and non-Opec producers to see the process through.
Value subsequently waned slightly but has since rebounded to again breach multi-year highs. Argus Consulting currently forecasts January and first-quarter 2018 Dated at $58/bl and $57.40/bl, respectively, with the second-quarter forecast at $59.23/bl and full-year 2018 at $58.66/bl.
In the past, freight rates for VLGCs — which transport an estimated 70-80pc of global tonnage — have been crucial for LPG arbitrage opportunities. But since a slew of new deliveries in 2015, when 50 new tankers hit the water, rates have slumped and remained depressed across 2016 and 2017, which also cumulatively saw around 50 new ships delivered.
The Argus freight rate assessment across the bellwether Mideast Gulf-Japan route averaged $92/t in both 2014 and 2015 before slumping to $30/t in 2016. Year to date, the assessment has averaged just shy of $28/t.
No rebound in rates is expected looking forward, despite a slowdown in the growth rate of the global fleet. Accordingly trade will continue unhindered by expensive freight considerations. The 28 VLGCs due for delivery before 2019 are expected to be sufficient to stop increased demand catching up with the slew of new tonnage that has already hit the water.
