If Saudi Arabia and Russia flood the world with their crude oil in the midst of a global demand crisis, it would have impacts and implications far beyond crude. A ramp-up in Saudi and Russian oil production this spring would also increase their output of associated gas and NGLs. At the same time, the opposite will be happening in the Permian and other liquids-rich U.S. shale plays, where producers, stunned by sub-$25/bbl oil prices, already are pulling back on drilling and later this year will see their oil and NGL production gradually level off and eventually decline. All this is already turning the international LPG market on its head — just last week, U.S. propane exports plummeted by nearly 40% versus the prior week, to only 889 Mb/d. Today, we consider recent extraordinary market developments and their effect on the arb between Mont Belvieu and Far East LPG prices.
The production and export of U.S.-sourced propane, normal butane and other NGL purity products has been an almost entirely good-news story for the past few years. NGL production growth in a number of shale plays led to the development of new NGL pipelines, new fractionation capacity, and new LPG and ethane export terminals. As we said in our Between Mont Belvieu and the Deep Blue Sea blog series, the U.S. flipped from being a net LPG importer to a net exporter in 2012. Since then, export volumes shipped to overseas destinations rocketed higher, from 318 Mb/d, on average, in 2013 and 683 Mb/d in 2015 to a hair over 1 MMb/d in 2017 and 1.35 MMb/d in 2019 — see Figure 1. In the first two and a half months of 2020, U.S. LPG export volumes continued rising, averaging just over 1.5 MMb/d, according to RBN’s NGL Voyager report, solidifying the U.S.’s status as the world’s #1 LPG exporter. That trajectory in export volumes has become a necessity because propane demand from the U.S. retail sector has been stagnant and NGL demand growth from the U.S. petrochemical sector has focused on ethane, not propane. Put simply, the NGL market has had to keep Mont Belvieu propane pricing attractive enough to keep exports flowing — that is, to keep the arb open to minimize use of that dreaded phrase: cargo cancellations. In response, LPG buyers in Asia (dark-blue bar segments), Latin America (light-blue bar segments) and Europe (orange bar segments) have turned to U.S. supplies as they ramp up LPG cracking utilization and invest in new technologies, especially propane dehydrogenation (PDH).
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