Pretzel Logic - U.S. Propane Now Knotted With the Far East's Enigmatic World of FEI and Ginga

U.S. production and exports of propane have soared through the 2010s, and an increasing share of the propane loaded onto gas carriers at U.S. Gulf Coast terminals is headed to the Far East. The numbers are staggering. So far in 2019, 57% of propane produced from U.S. gas processing plants and refineries has been sent overseas, with about half of that total moving to Asian markets. With exports to Asia now such an integral piece of the propane supply/demand balance, the price of U.S. propane during most of the year is influenced more by the markets in Japan, South Korea and China than it is by demand in Iowa, Michigan and Pennsylvania. The challenge for U.S. propane marketers, producers and exporters is that, to the uninitiated, the Asia propane market is quite convoluted, being dominated by obscure market mechanisms known as FEI and Ginga. Today, we continue our series on international LPG trading with an explanation of how these mechanisms work together to establish propane prices in Asia and, by extension, the Gulf Coast.

In Part 1 of this series, we reviewed the U.S.’s 2012 flip from net LPG importer to net exporter, and the rocket-like rise in export volumes over the past seven years. We noted that, in any given month, it’s now common for 55 to 60 big, fully laden Very Large Gas Carriers, or VLGCs, to set sail out of Gulf Coast ports, including Enterprise Products Partners and Targa Resources’ export terminals on the Houston Ship Channel, Energy Transfer’s facility in Nederland, TX, and Phillips 66’s docks in Freeport, TX. (Most of these VLGCs are capable of transporting about 550 Mbbl of propane and/or normal butane.) And we said that we expect LPG exports to increase further with the ongoing start-up of an expansion at Enterprise’s terminal and planned or likely expansions elsewhere. Part 2 walked through the step-by-step process of putting together a typical propane export deal — buying the propane on the Gulf Coast, negotiating the terminal fee, arranging for VLGC shipping, and hedging the deal to help protect ourselves against a potential loss. We covered the use of the Far East Index, or FEI, in our hedging strategy. FEI — officially called the Propane Argus Far East Index price assessment, or AFEI — is an index price used in the pricing formulas for most spot propane deals sold into the Far East, or about 50% of the total supply into that market. (Most term contracts are priced in relation to the Saudi Contract Price for propane, or “CP.”)

It is the spread, or “arb,” between U.S. propane in Mont Belvieu and propane that is delivered to Asia based on FEI that encourages — or discourages — U.S. propane exports. As shown in the left graph in Figure 1, the propane FEI (blue line) is up relative to Mont Belvieu LST propane (a.k.a. TET propane; orange line), especially since the drone attacks on Saudi oil facilities in mid-September. The green line in the right graph in Figure 1 is simply the arb — the difference between FEI and Mont Belvieu. For more about the arb, see Part 2.