Global LPG Conversations: Northwest European Q3 propane pricing review

David: Welcome to Argus Global LPG Conversations. My name is David Appleton. I'm Vice President for Business Development at Argus Shipping LPG. And I'm here today with Amy Strahan. She is our editor for the Argus NGL Americas report. And we're going to discuss the recent trends and outlook in the U.S. Good afternoon, Amy.

Amy: Good afternoon.

David: So we're going to start with I think what's a pretty hot topic that we touched on on our recent webinar, and that's to spot terminal fees for U.S. cargoes. And they reached an all-time high in September. And so let's start. Can you just give us your view about what that tells us about terminal capacity going forward? Or do you think it was just related to weather issues?

Amy: Sure, sure. Well, Argus's terminal fees for spot-loading cargoes hit a record of 32.5 cents in mid-September. And it does underscore some of the tightness we've seen this year in the secondary spot market. So this came, of course, after months of scheduling delays. It started with an unexpected derecho that hit Houston in late May. That knocked out power to a wide swath of the region. And then that storm was quickly followed by Hurricane Beryl in early July, which caused another round of power outages and planned maintenance at Targa's Galena Park terminal, which just added to the round of scheduling delays for term lifters out of the Gulf Coast. So while terminals were focused on meeting their customer commitments, that left no spot cargoes available for them in the secondary market. And so any term buyer with an extra cargo to sell could really name their price. So that culminated in the $0.30 per gallon premiums relative to Mont-Bellevue we saw in the first half of September.

David: Right. And then for some of our international listeners, $0.30 per gallon is I think something like $160 per tonne or thereabouts, I believe. So basically very, very expensive. Yeah. And so in a normal market, sellers tend to see spot terminal fees capped by freight. Is that correct?

Amy: Yes. Yes. In a normal market, yes. But during the same time, we actually saw spot VLGC rates on Houston-Chiba basis falling from $145 per tonne in mid-May to as low as $79 per tonne in mid-September. We think that the weakness in spot freight rates followed the easing of Panama Canal delays. And so that meant that the newly built vessels that had entered the market earlier this year finally were able to ease the availability for spot freight out of the U.S. So you had lower freight and a wider arbitrage between the U.S. and the Argus Far East index. So that meant sellers of spot cargoes could really reap the higher netbacks to the region. For instance, we saw the paper spread between October AFVI and Mont-Bellevue widened to about $278 per tonne in mid-September. Well, at the same time, VLGC freight was only $115 per tonne. So when you look at that, that's a lot of meat on the bone, frankly, for sellers to reap on that netback.

David:: Right. Okay. Very interesting. I think a situation that we haven't seen in really quite some time in the global market. And then just to clarify, this is all the secondary spot market, I believe. So then does it have the same sort of impact on term cargoes in terms of the fundamentals shipping out of the U.S.?

Amy: No, it doesn't really appear to have had a meaningful impact to overall shipments from the U.S. This is according to Kepler data. Kepler has both propane and butane loadings out of the U.S. falling to 2 million barrels per day in July. And that's still above the about 1.9 million barrels per day we saw shipped in July of 2023. Moving forward to September, U.S. LPG exports, according to Kepler, rose to about 2.2 million barrels per day, which is still higher than we saw last September, which was just at 2.1 million barrels per day. So we did see higher prices in the spot export market, but it shouldn't have caused any meaningful impact to overall trade flows out of the U.S., even when we had fundamental drivers like loading delays and maintenance.

David: Right. And you mentioned maintenance. The Nadal and Tamil recently saw some work, is that right?

Amy: Right. Yes. Yes. It's still ongoing, actually. Energy Transfer recently confirmed some planned maintenance at Nederland to tie in equipment related to its 250,000-barrel-per-day expansion there. But butane and ethane exports out of Nederland resumed very shortly, just basically in the second week of October. Although we are hearing from market participants, there's some propane compressor work that remains ongoing.

David: Okay. And just to clarify for our listeners, we are recording this at the end of the second week, on the 11th of October. So by the time you listen to it, the situation may have changed, obviously, read the Argos reports to find out if there's any change to that situation.

Amy, have there been any impacts on prices because of this?

Amy: Yes, there was impact to inland prices at Montbellview, Texas, especially at the end of September, that we think was associated with all of this tie-in work. Energy Transfer, of course, operates the LST storage cavern. Some call it LDH, which is an older term. But that LST storage cavern in Montbellview saw in-well propane prices drop to 50 and one-eighth cents per gallon, which for international subscribers is about $261 per tonne at the end of September. And that was a multi-year low at that location. Of course, LST propane rebounded immediately when the calendar month rolled over to October because we are in a contangled market. Enterprise in-well propane at Bellevue was less affected. But in any case, even though you saw the steep declines at Bellevue, the premiums versus Bellevue and terming fees for propane cargos still remained well above $0.20 per gallon.

David: You mentioned October. I think I just said we were recording this on the 11th of September. And if I did, I am incorrect. I meant to say October, although I might have said October. So apologies for that.

Amy: I think you said October.

David: I did. Okay. Right. So for a second there, I thought I got my months mixed up. So we can carry on. Let's backtrack a little bit. We saw a pretty tight market for spot cargos for all of the third quarter. Is that something that's going to persist into next year, do you think? Is this the new norm?

Amy: Well, I mentioned the tie-in work for energy transfers, Nederland expansion and enterprise, of course, is also in the midst of a build-out of new capacity at its Houston export terminal. And so all of this work is going to be completed by 2026. Now, I'm not a forecaster, but in previous years, whenever we saw spot terminal fees going well and above beyond the term rates that we see for contracted liftings, that has actually evaporated when the new capacity in dock space comes online. I believe the last major build-out we saw was back in 2016. So we're kind of really overdue in a sense for added capacity to meet international demand and growing production of the Permian Basin.

David: I see. And then you note that the work is currently underway, but also the completion of those projects is 2026. In the really short term going into this winter, what does it mean for the outlook for U.S. exports?

Amy: Well, it looks like right now in mid-October, much of the November loading schedule is already set. We've seen a lot of spot freight fixtures for late November recently that really bolstered spot VLGC rates. And those cargoes, of course, will be delivered into Asia in late December and early January. So the big gulp in winter export demand is likely mostly behind us, at least as far as the U.S. market is concerned.

David: Right. And then yeah, when we think about the U.S. market and the other side of the coin here with the domestic market, what are your thoughts on this winter?

Amy: Well, U.S. propane stocks haven't really built up at quite the pace we'd expected this month. But even so, we're still about 9% over the five-year average, according to the EIA. So just important to point out that the U.S. relies mostly on natural gas, not propane for winter residential heating. But we are currently in the middle of a La Nina pattern that's cooling the water over the Pacific Ocean. This is expected to persist through the winter, at least according to the U.S. National Weather Service.

La Nina years often result in colder weather across the northern half of the United States and Canada and a little bit more precipitation. So we could see more propane demand, especially in sort of the mid-continent United States than we saw last winter. Last winter, of course, was very mild. But it's unlikely that this is going to translate into any major shift in pricing at Bellevue, which of course tends to move in tandem with delivered market in Asia, particularly AFDI. Most recently, I think it was earlier this week, the EIA actually forecast a 6% increase in domestic propane consumption for heating this winter versus last. That's of course, mostly coming from the U.S. mid-continent. But at the same time, EIA is also expecting, on average, a 5% decline in U.S. residential propane prices this winter versus last year.

Looking a little bit north to Canada, we only have the propane inventory data there as of the start of September. But it appears overall Canadian propane stocks are at about 10 and a half million barrels, which is down about 7% versus the five-year average. That of course is due, in part, to all the strong export demand we see on the Pacific coast there out of British Columbia. But at least in terms of spot pricing, Edmonton propane is still really deeply discounted relative to the U.S. mid-continent, which of course is priced at Conway, Kansas. So it doesn't appear that there's any critical shortfall there, even with more exports.

David: Very interesting. Thanks for an overview of the situation domestically. I am based in London here in Europe. We are seeing quite unusually a backward dated forward curve going into winter. I think that's possibly based on the fact that there's been a lot of prompt demand. But I think one could make an argument that prices will be higher when we get to those months. What is the situation for propane pricing on the forward curve over there?

Amy: Right. Well, here in the U.S., our forward curves team is actually showing about a $0.04 per gallon, which equates to about a $21 per tonne carry between October and January, which is a lot steeper than the forward curve we saw at this time last year. But again, forward curves are notoriously bad predictors of prices. And we think that that's probably more reflective of the weakness that we're seeing for October propane and won't really necessarily reflect what we're going to see later this winter.

David: Right. Exactly. We've spoken most of the time here about propane. Just moving to the heavier grade, butane. What's the situation as the fourth quarter in the U.S., UCC's lot of domestic demand for winter-grade gasoline blending? How is that segment shaping up this year?

Amy: Butane at Mont-Bellevue is actually up pretty sharply from what we would ordinarily expect this time of year, or at least let's say from what we saw last year. Last year in particular, butane inventories were pretty oversupplied. But just by way of comparison, when you look at butane's price relative to our RBOB gasoline futures, butane has been averaging about 55% of RBOB so far in October. When you compare that versus October of last year, that was only basically 36% the value of gasoline futures.

David: Okay, interesting. So basically, can we say butane is really tight?

Amy: It's certainly tighter than last year. Part of this, we think, was likely because we saw blenders getting a slightly earlier start to the winter-grade blending season this year. In the U.S., we had an oversupply of summer-grade gasoline. And so many market participants opt to switch over to winter-grade blending a little bit earlier than we would normally expect. And at the same time, it also appears that we're seeing a larger share of split or butane-only exports here in the early fourth quarter. A lot of US LPG term customers are required to take a certain annual percentage of butane from the terminals. And so far, it appears that many of them have waited closer to the end of the year to go ahead and take their allotted butane, which is helping whittle away stocks at Mont-Bellevue in the past couple of months.

David: Great. Okay, thanks. I think we'll wrap up there. That's a really insightful overview of the situation in the U.S. Just a note again to our listeners, this podcast is part of a series. We had a webinar which was published last week. So do look for that if you haven't seen the webinar. That's going to be on a kind of higher level, the global picture and a little bit of the view forward as well from our consulting division. And then we also have webinars coming out each week for the rest of this month on Thursdays. So again, next week, we'll have Europe on the 24th of October, and we'll finally finish up with Asia Pacific on 31st. And do feel free to write in with any questions. There should be email addresses on the console. You can get in touch with us at lpgas.argustmedia.com or with us directly on LinkedIn or any other channels. We're always happy to talk to you. Listeners and clients, thank you very much, everybody. Thank you, Amy.

Amy: Thank you.

David: And yeah, have a great day and we'll look forward to doing some more of these as we go into the next year as well.

Amy: Thanks, David.