The U.S. propane market is in a unique position. Production has continued to grow while domestic demand remains stagnant. The only solution for the market to balance is exports; however, those have been constrained by capacity at the dock. Today, we continue our examination of the propane market.
Supply disruptions in the Persian Gulf have sent global propane prices soaring, sharply widening the spread between international and U.S. prices. That has created a major opening for U.S. exporters, but with spot terminal fees at record highs as key export hubs already running near capacity, upside is constrained by loading capacity.
Propane prices at Mont Belvieu soared above $1/gallon on Wednesday — the first time that’s happened in the month of June since 2014. This buck-and-change price doesn’t come as much of a surprise for industry insiders, however. U.S. propane inventories have been very skinny lately, sitting at 56.2 MMbbl — or only 587 Mbbl above the five-year minimum based on yesterday’s EIA data. At the same time, propane exports have been riding high, averaging 1.3 MMb/d so far this year, up nearly 90 Mb/d from the same time frame in 2020, while production has remained virtually flat over the past 18 months. Surprise or not, the spike past $1/gal raises an important question: How high will U.S. propane prices have to go before exports are reined in so U.S. inventories can increase? Today, we discuss the key drivers behind the current price level and our propane market outlook for the second half of the year.
Things move fast in today’s propane market. Two weeks ago, Mont Belvieu propane was going for almost 95 cents/gal, up 86% from the mid-November price of only 51 c/gal. Midcontinent propane assessed in Conway, KS, spiked even higher, doubling over the same time frame to more than a dollar per gallon. But last week some air came out of the balloon, with Mont Belvieu and Conway prices pulling back to the low 80s. That didn’t last long either. This week, Mont Belvieu is back up to the high 80s c/gal. What gives? Is the market simply being bounced around by vacillating weather forecasts? Or is there more to it than that? Could it be that we are seeing symptoms of an export-driven transformation that is making propane markets behave quite different than they have in the past? Today, we’ll consider these questions and where the propane market may be headed in 2021 and beyond.
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.
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.
