Viewpoint: US propane arbs to Asia poised to weaken

US market participants fear LPG exports may slow in the first quarter of 2019 as a steep backwardation in Asia's forward curve for propane will further narrow the arbitrage.

The December loading schedule for US exports was full as Mont Belvieu propane prices adjusted to the international market. But with February paper on the Argus Far East Index (FEI) at a backwardation to the prior month, the schedule for January appears far less certain.

Market participants saw a late December cargo resold at Mont Belvieu +5.125¢/USG at the start of the month, but netbacks to Asia quickly fell below +4¢/USG at the end of December as the steady influx of LPG to Asia during the fourth quarter depressed prices in that region. Steep declines in crude seen during the month further eroded naphtha values, and international LPG prices sank in step with the global malaise.

At the same time, the brisk freight business into Asia lent support to spot freight, further depressing netbacks. Asia remained the most favorable destinations for US cargoes throughout much of December, as Europe is well-supplied even with only minimal shipments that direction.

At the start of January, however, US propane prices at Mont Belvieu have fallen in lockstep with FEI paper, propping the arbitrage open.

US propane at Mont Belvieu, Texas, remains at a steep discount to midcontinent prices at Conway, Kansas, despite strong heating demand, as US production gains this year appear to be more than keeping pace with exports. US propane exports averaged 984,000 b/d in November, up from 968,500 b/d the prior year, while propane production from gas processing averaged 1.98mn b/d in November, up from 1.85mn b/d in November 2017.

At the same time, prices in western Canada also remain at a discount to the US as railcar constraints there leave LPG stranded in that region this winter.

In 2018 Chinese tariffs of 25pc on US propane helped weaken demand for US-origin cargoes, although market participants are hopeful these may be short-lived. Outages at PDH units also curbed Asia's appetite for US LPG.

As a result, spot LPG cargoes on the US Gulf coast continued for January loading were to be discussed at or just under Mont Belvieu +5¢/USG for much of December. Some US observers warn the arbitrage could shut entirely if US heating demand finally closes the southbound arbitrage between Mont Belvieu and Conway. February offers so far are sparse, but netbacks on 3 January were improved, at about +6¢/USG for the February/March.

With a well-supplied US market and steady fixtures already bound for Asia, US propane may see further declines in a fundamentally oversupplied market.