Some Butane That I Used to Know - Implications of the Mercurial 2017 Asian Butane Market, Part 2

2017 saw some tumultuous times for Asian butane. What started the year as a tight market, with butane trading at $120/ton over propane — a 25% premium — flipped to a surplus market in the second quarter, with the products trading about even, then reversed again later in the year. In the middle of it all was India, whose relationship with butane as a cooking fuel suffered a spring break-up before reconciling in the fall. It was a textbook example of how today’s energy markets are buffeted by changes in production trends, government intervention and the growing influence of U.S. exports, which are becoming a much bigger deal in the global butane trade. Today, we continue our discussion of the supply and demand dynamics that shaped Asian butane markets in 2017, and what these trends may mean for 2018.

If you are not familiar with international LPG markets (propane and butane), it would be helpful if you go back to Part 1 of this series, where we reviewed the differences between U.S. propane/butane and the markets for those commodities in the rest of the world, particularly Asia. We covered conversions between U.S. volume-based pricing (cents/gallon) versus international weight-based pricing (dollars/ton), ship transportation versus pipelines, and — most important of all — the end-use markets for butane. In the U.S., very little butane goes to home cooking/heating, while in Asia, significant volumes are used in that sector. We also covered the big price trends of 2017 compared with 2016, in the context of the Saudi Aramco Contract Price, known as the CP.

The reason for this focus on Asia LPG — and butane in particular — is the roller-coaster ride the product took last year. In the first quarter of 2017, butane was scarce and expensive in Asia, and as a result, butane prices were high. There were a number of contributing factors, including reduced export supply from traditional Middle East producers such as Saudi Arabia and Qatar due to the OPEC deal to cut oil volumes (which also reduced LPG production). But increased demand was also a factor, particularly from importers like India (more on that in a moment) and Indonesia. As a consequence, the butane price premium over propane skyrocketed to more than $100/ton in early 2017 and Saudi Aramco set a very high $120/ton premium for butane over propane in its March 2017 Contract Price (CP).