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Asia faces costlier LPG as low US oil price prompts NGL estimate cuts

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Low US oil prices have prompted a significant downward revision of the US NGL production over the next few years, which may increase LPG import prices for Asia, according to S&P Global Platts Analytics.

The drop in 2020 is expected to be about 289,000 b/d, or 4.6% below initial estimates, followed by 776,000 b/d in 2021, down 12% and then reaching the maximum decline of about 1.12 million b/d in 2022, down 16%, said Platts Analytics.

“Due to the significant drop in recent oil prices, our latest forecast shows the near term, April-June, US NGL production falling. This essentially means low purity product — ethane, propane and butane — production,” Platts Analytics said.

Upstream companies’ debt-related issues have also led most of them to significantly revise down the capital expenditure guidance.

Enterprise Products Partners said it will slash 2020 capital spending by more than $1 billion and delay projects, as it adjusts to the changing energy environment and as the midstream sector adjusts to declining business and volumes due to the coronavirus pandemic.

Unlike crude oil, storage for NGLs is currently, or in the foreseeable future, not an issue, while lower NGL production makes this even less of a problem.

This was seen in Enterprise’s decision to convert its NGL storage for oil products, while infrastructure constraints for gas processing, fractionation, and terminal capacity have been resolved, said Platts Analytics.

Traders said lower NGL production would push Mont Belvieu prices higher, which will then drive up Asian markers Argus Far East Index and Saudi contract prices in the short term, even as term supply from Saudi Arabia for May loading saw some cancellations and deferments due cuts in OPEC+ oil production.

India would continue to take Middle East supply, though imports have paused on ample stocks. However, China — which recently resumed imports of US LPG with easing of trade tensions — as well as South Korea, Japan and Indonesia, would need to compete for Middle East volumes. They will also seek alternatives from West and North Africa, Australia, Canada and Russia, traders said.

The recent return of Chinese propane dehydrogenation plants from shutdowns have restored demand for propane as feedstock and pushed the premium of propane to butane above $30/mt this week.

But traders said after Chinese imports hit about 1.7 million-1.8 million mt in May, June volumes are estimated at 1.5 million mt, which could somewhat ease the impact of lower US shipments. Chinese imports fell almost 17% year on year in March to 1.27 million mt, customs data showed, as demand was dampened by government measures to contain the coronavirus spread.

US MARKET COULD BE SHORT BY JUNE/JULY

As lower US crude oil production targets take hold for May, June and July, unconventional producers are shutting-in some 1.3 million b/d of crude, which suggests a lowering of LPG volumes by around 275,000 b/d, Platts Analytics said.

“Depending on the duration and further magnitude of those cuts that shortfall may tighten up markets from the supply side. Alternatively, the current WTI price around $25/b suggests that those shut-ins may not hold out for very long and we may see some production coming back,” according to Platts Analytics.

Lower production beginning this year would also reduce US domestic propane stocks for winter, and lead to lower exports, traders said.

Expectations of a rare Arctic blast into the US Northeastern states this weekend, bringing record cold temperatures, adds to concerns of a jump in demand for heating fuels, trade sources said.

US exports have been fluctuating in recent months, according to industry estimates, with 2.4 million mt loaded in January, 1.7 million mt in February, 2.3 million in March, 1.5 million-2 million mt estimated for April loading and around 1.3 million mt for May loading that is due for June arrival to Asia.

Lower availability at the dock will depend on demand overseas to set the price, Platts Analytics said. “If India, Indonesia, and Brazil are able to satisfy their domestic demand, then there may be some room in the market.”

Platts Analytics said if US propane stocks do not rise to 70 million barrels by the end of summer, “we think there could be a lot of pressure on Mont Belvieu propane prices.”

“If product availability does become limited in the June/July time frame, a price increase may come out against shippers rather than passed through to prices in Asia. Cancellations on lack of product will leave a few vessels free to cut freight costs,” according to Platts Analytics.

But overall, US LPG exports are expected to remain high this year on open arbitrage to Asia, where residential and household demand remains firm.

CFR North Asia prices have rebounded from around two-decade lows of $185/mt on March 23, to $317/mt on May 6, according to S&P Global Platts data. Platts FOB USGC propane cargoes were assessed at $217.93/mt on May 7.
Source: Platts

 

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