Downstream demand is unlikely to pick up, with concerns around an oversupplied market also weighing on sentiment, writes Efcharis Sgourou
Northwest Europe's imports of LPG from the US rose sharply in the third quarter as regional demand unexpectedly firmed during the summer off-season. And arrivals are likely to drop this winter, contrary to typical seasonal patterns.
The region imported around 580,000t of US LPG in September, the second-largest monthly volume this year after August's 592,000t, Argus estimates. This lifted arrivals to 1.74mn t during the third quarter, the highest since late 2022 and nearly a third up from 1.34mn t in the second quarter. The increase in import demand came as a result of regional supplies falling significantly during maintenance season in the North Sea, in particular at Norway's Karsto, Kollsness and Nyhamna gas processing plants. Some earlier-than-expected demand for stockbuilding prior to winter then led to prompt buyers on the spot market raising their bids in order to attract US LPG cargoes, in turn bolstering the price of cif Amsterdam-Rotterdam-Antwerp (ARA) propane large cargoes, which rose to their highest against front-month Ice Brent crude in more than a year.
The spread between northwest European propane import prices and northeast Asian equivalents under the Argus Far East Index (AFEI) started to narrow towards the end of the third quarter, with the cif ARA discount reaching a little under $50/t compared with over $100/t in June and May. And although the transatlantic arbitrage was largely shut from July onwards, a few narrow periodic openings allowed European buyers to compete with Asia for US cargoes.
Looking to the fourth quarter, spot buying interest for large cargo deliveries in the first half of October looks relatively firm but downstream demand is likely to remain static rather than picking up as temperatures fall. European ethylene steam cracker demand is also unlikely to grow as although run rates improved over the past few months, they are yet to fully recover from recent lows. Propane has been at a steep discount to naphtha from March until May at below -$150/t, supporting demand from flexible crackers. But it has narrowed significantly since, the spread rising above -$50/t in late August — the tightest since February 2023 — and standing at -$66/t by 25 September, curbing buying interest from the sector. The spread could widen marginally in the final quarter but it may not be able to incentivise more demand.
The Karsto processing plant's return to full operations from late September and most other North Sea works coming to a close, as well as an anticipated light turnaround schedule for the region's refineries, will increase northwest European supply in the fourth quarter and decrease the dependency on imports of US LPG. Concerns the supply might overshoot demand has weighed on spot market sentiment in Europe, with October cif ARA propane swaps standing at $583/t on 24 September, compared with $569.50/t for December paper — an unusual backwardated structure into one of the peak months in terms of demand. The backwardation — prompt prices at a premium to later ones — is less indicative of prompt market bullishness and more a reflection of weak sentiment towards the end of the year.
Heavy Asian stockpiling
Sentiment in Asia-Pacific is also weak, with the AFEI forward structure in backwardation of around $5-7/t between October and December. This is largely a result of heavy stockpiling in Asia during the third quarter that has weighed on paper prices.
Meanwhile, front-month US prices at the US Gulf coast hub of Mont Belvieu have traded at discounts to December prices given concerns over exports during the fourth quarter. The price of US Gulf coast fob cargoes jumped to 25¢/USG premiums to Mont Belvieu prompt prices in September from 12¢/USG in June and 9¢/USG in May, an indication that export terminals are nearing capacity. Planned expansions of some of the key terminals are not due to start up until 2025 and 2026.
