Weaker US Gulf Coast propane prices, coupled with increasing Northwest
European prices, have widened a potential arbitrage and resulted in ships
moving to the US Gulf Coast from Europe.
The fall in Gulf Coast propane is attributed to seasonal demand changes,
increasing production and constrained infrastructure. US Gulf Coast June
propane was trading at 86.15 cents/gal ($448/mt) Thursday morning,
slightly lower from Wednesday, but 4.5 cents lower from June 6, Platts data
Europe is trading on its own set of fundamentals with delivered
Northwest Europe cargoes assessed at $789/mt on Wednesday, $102/mt stronger
since May 31, on tight cargoes as European cargoes leave the region for West
Africa and Asian markets.
The freight rate for a VLGC sent from Houston to Northwest Europe was
talked in the $80/mt range, implying a cargo sent to Northwest Europe could
see $261/mt arbitrage opportunity before factoring in terminaling.
Not surprising, the partially laden BW Liberty and unladen Dorset were
two VLGCs heading to Houston with expected arrival in late June and early
July, Platts cFlow software showed.
Gulf Coast propane has fallen to roughly 37.8% of the front-month NYMEX
crude contract, eight percentage points lower from April 17 and 0.50
percentage points weaker from the same time last year. Historically, propane
has traded around 60% of the front-month NYMEX crude contract, according to
The severe weakness in Gulf Coast propane is attributed to changing
fundamental factors as well. One, production continues to increase as wet gas
production continues to yield a higher return for producers relative to dry
gas production. As such, the most recent US Energy Information Administration
data showed that March propane production from natural gas totaled 768,000
b/d, 12.6% higher from March 2012.
At the same time, the takeaway avenues remain constrained as export
infrastructure and PDH facilities continue to be built out at a slower rate
than production. As a result, the US has seen a growth in propane stocks as
supply outstrips demand. Weekly EIA data released Wednesday showed that Gulf
Coast stocks grew 1.11 million barrels to 28.96 million barrels, about a
million barrels higher than 2012.
The most recent EIA data showed Gulf Coast exports reached an all-time
high in March, reaching 8.9 million barrels. The trend is expected to only
increase as export projects get built out on the Gulf Coast and traditional
Latin American buyers will absorb the majority of US sourced propane due to
its proximity. However, increasing interest is emerging from the Northeast
Asian markets for US sourced propane. Japanese, South Korean and Chinese
companies are all looking to diversify feedstock supply sources and also seek
lower prices. The Middle East is the major supplier for LPG to Asia.
Propane shipments to Asia will see the biggest jump once the Panama
Canal is expanded in mid-2015 as this will cut down he shipping time by
approximately 16 days and drop the freight rates. The freight rates for
sending LPG to Asia around South America were over $200/mt on Wednesday, a
Gulf Coast shipping source said. At the same time, shipments through the
Panama Canal were around $140/mt. But, only a handful of narrower VLGCs
are able to fit through the Panama Canal. Nevertheless, work will allow for
wider VLGCs to traverse from the Gulf of Mexico to the Pacific waters.
In the near-term, the arbitrage to Europe will remain a more attractive
home for US propane with the major Singapore-Japan route assessed
at $867/mt on Thursday, $219/mt higher than Gulf Coast propane when factoring
in a $200/mt freight rate.
--Mike McCafferty, firstname.lastname@example.org
--Edited by Katharine Fraser, email@example.com