The large cargo cif Amsterdam-Rotterdam-Antwerp (ARA) propane market is set to tighten on supply constrains in 2025, as regional supplies and imports could slow, but demand is likely to remain erratic.
Local availability from the North Sea is suppressed, with natural gas prices higher than those for propane. Production is largely dependent on gas processors that have the ability leave propane in the natural gas stream when the lighter grade becomes significantly cheaper, to maximise profits and yields.
Current economics favour natural gas. The average spread between the fuels so far in December places large cargo propane at an average -$130/t discount, incentivising price-sensitive refineries to hold on to their propane.
The forward curve for natural gas is in a contango structure, reflecting ample stocks and sluggish demand for the season, and a stronger outlook for next year. In contrast, prompt propane is priced higher than future values. The European propane swaps curve is heavily backwardated out to June 2025, with a January-February spread at $12/t and February-March at $19/t, widening the discount of the lighter grade against natural gas. This creates conditions for gas processors to leave more LPG in the gas stream over the first half of the year, possibly tipping local balances into tightness.
Supply from European refiners that can switch from sellers to consumers of LPG, and use their own LPG production depending on the price balance between propane and natural gas, has so far been unaffected. The fca propane inland railcar price has hovered at a significant premium against natural gas in recent months, but if the lighter grade loses strength then production from refineries could be trimmed.
With weaker regional output, European buyers will be more reliant on US imports. In the first half of 2024, the European region was flooded with US LPG, but this is unlikely to be repeated.
The Panama Canal drought led to transit difficulties at the beginning of 2024, creating long queues and increasing delivery costs to send product east, freeing a surplus of US LPG to Europe at a time when demand was subdued.
Transits through the Canal dropped by almost 30pc in 2024, according to the Panama Canal Authority. Yet, in recent months steady levels of precipitations pushed the water levels at the Gatun lake, the reservoir that supplies the isthmus, to a two-year high. Early forecasts indicate the passage will remain a reliable route for the first quarter of 2025.
With no constraints to move US product east, European buyers would have to compete with the steep premiums typically offered in Asia-Pacific, creating tougher conditions to secure US LPG.
Demanding conditions
On the demand side, consumption from the petrochemical sector is likely to rise somewhat over the first quarter of 2025 as operating rates pick up, although margins are unlikely to improve by much.
Ethylene crackers, which can oscillate between LPG and naphtha depending on economics, currently favour the latter, as the December propane-naphtha differential has hovered below the -$50/t discount threshold that incentivises a switch to naphtha and suppresses demand for propane.
But forward curves show a steady widening of the negative differential in the first half of 2025, which should put propane back into the game.
Demand from the heating sector has been lukewarm due to the mild weather conditions in Europe, and temperatures could remain slightly above seasonal averages in the UK, France and Germany in December and January, Speedwell Weather data show.
Even without any strong demand, the prevailing sentiment looks a notch more bullish in the first half of 2025 than in the first six months of 2024, when the region was oversupplied and pressured by the excess selling competition. In contrast, in 2025 European buyers might be faced with an uphill fight to seize US product and to secure local production.
