Despite increased LPG production in the US supporting growing exports, the US-to-Europe spot arbitrage has been “slammed shut” from higher freight rates and weaker post-winter demand hindering spot transactions into the region.
At the start of April, the VLGC freight rates were assessed by Platts at $100/mt from the USGC to Japan and $62/mt to Northwest Europe but on May 3, Platts assessed the route to Japan at $130/mt and the route to Northwest Europe at $78/mt, according to S&P Global Commodity Insights data.
The higher freight helped narrow the CIF NWE propane premium to FOB US Gulf Coast propane to $50.1/mt on May 3, in from $57.03/mt on April 3.
The strength of freight rates at the end of April was due to increasing arbitrate demand for LPG cargoes. The rates are expected to soften, however, because “it doesn’t seem like there’s much interest left for 1-10 June now so owners might settle for a little less,” a market source said, but it was too early to tell if that would enable spot cargoes to move.
Although recent volatility in crude has been weighing on LPG prices, sources expect LPG volumes out of the US to continue to climb.
Crude prices have moved sharply lower recently as fears of a global economic slowdown, weak product cracks and uncertainty in financial markets have depressed demand. Platts Dated Brent shed $9.50/b to $72.51/b over April 28 to May 3, according to S&P Global.
LPG prices in Europe have fallen far below prices Asia which has provided less incentive for anything supplementary to contract volumes to be exported from the US into Europe. Lower demand across Europe has provided little support on prices compared to the strong petrochemical feedstock demand in Asia.
Platts, a part of S&P Global Commodity Insights, assessed CIF NWE large propane cargoes at $421/mt on May 4 and butane at $397.50/mt.
This put European propane at a $117/mt discount to the CFR South China cargo market and put NWE butane at a $122.50/mt discount to CFR North Asia.
Weaker European attraction
US LPG exports to Europe and Asia have been on a steep upward trend since 2014, with levels in 2022 reaching 36.35 million mt, Kpler shipping data showed.
While exports to Europe have grown gradually to 9.98 million mt in 2022 from 2.40 million mt in 2014. Over the same period, US exports into Asia grew at a significantly faster rate to 26.04 million mt from 2.73 million mt.
Of the 2022 US exports, around 27% landed in Northwest Europe and the Mediterranean, while the remaining volumes were sent around Eastern, South-East and South-Central Asia, the data showed.
In 2023 so far, volumes have remained relatively steady, aside from a spike in March when sources suggested US production hit recent highs. In April, US LPG exports to Asia and Europe reached 3.21 million mt, with around 68% going to Asia.
LPG traders suggested that typically at least 70% of US monthly volumes will go to Asia instead of Europe, due not only to prices being higher there but demand being consistently stronger allowing sellers to lock in longer term contract customers.
Given the current LPG discounts to naphtha in both Europe and Asia, LPG’s growing global demand as a petrochemical feedstock has continued to pull in growing US supply.
In Europe, the propane CIF NWE large cargo market was at a $142.50/mt discount to the naphtha CIF NWE front month swap on May 4. While in Asia, the propane CIF North Asian market was at a $49.28/mt discount to the Naphtha C+F Japan cargo market on May 5, S&P Global data showed.
US LPG exports on the rise
“US LPG exports are expected to increase more than 11% year over year for 2023 and surpass more than 2 million b/d by 2024. As NGL production continues to grow in the US driven by oil and gas production primarily from the Permian, LPG supply is expected to increase with a lack of major demand growth domestically,” analysts at S&P Global said.
The analysts pointed to several expansion projects, such as Targa Resources Corp.’s Galena Park expansion which is expected to add around 33,000 b/d in 2023 and Enterprise Products Co.’s newly announced expansion of around 120,000 b/d in first half of 2025.
“The incremental supply is expected to be exported to support demand growth, primarily from mainland China.”
The analysts added that despite weaker petrochemical margins, feedstock demand is expected to increase as mainland China brings new propane dehydrogenation, or PDH plants, and cracking capacity online.