US Gulf Coast to Northwest Europe propane arbitrage widens

Houston (Platts)--13Jun2013/1248 pm EDT/1648 GMT


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 showed.

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 sources.

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, michael.mccafferty@platts.com --Edited by Katharine Fraser, katharine.fraser@platts.com