Europe LPG prices uptrend capped by waning fundamentals

LONDON (ICIS)–The European liquefied petroleum gas (LPG) market suffered last week a disconnection between prices and fundamentals.

Spot barge prices posted major gains in the seagoing market, edging up by 25% week on week by 16 August.

Meanwhile, prices in Amsterdam-Rotterdam-Antwerp (ARA) and the Mediterranean recorded a 7-8% rise from the previous week.

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LPG gains were caused by naphtha’s volatility on the back of crude oil prices fluctuations, rather than by market fundamentals.

Upstream crude oil prices have been volatile, mainly led by macroeconomic indicators such as the US-China trade war and weak economic data, leading to thin demand and causing length in the market.

This continued to put a downwards pressure on naphtha prices, which after losing strength since the start of August, down by 12%, stabilised at current lows by 16 August.

Consequently, the rise in propane and butane as a percentage of naphtha was capped with weakening supply-demand fundamentals, adding to the woes.

Fewer deals were reported within the window for both butane and propane as traders cited usual dullness in the market during this time of the year.

That said, overall demand for LPG has been relatively slow this year, with Eurostat data highlighting a drop of 4.33% year on year in the first four months of 2019, with sources blaming a warmer-than-usual winter and a high turnaround of crackers earlier this year as factors limiting demand.

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On the supply side, length in the market persists as abundance of material meets narrowing demand putting downwards pressure on prices.

The butane price as a percentage of naphtha dropped marginally due to greater volatility in naphtha prices bearing the brunt of slowing crude, coupled with waning demand-side fundamentals.

While the trend has been mirrored in the propane market, the impact has been further exacerbated by growing stocks in the US – a key supplier to Europe – having higher production rates.

In fact, according to the Energy Information Agency (EIA), US propane stock levels hit two-and-a-half-year highs last week, up 24% than at the same time last year.

As the chart below indicates, US propane inventories have been elevated throughout most of this year compared with last year, when they were considerably low.

This suggests that more material was available for the exports market while domestic consumption levels were low.

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The propane-naphtha spread stood at a range of minus $142 to minus $165/tonne for September this week, which is a narrower spread versus last week.

Despite the bearishness looming large and the market softening to the current levels for the time being, European LPG players are optimistic expecting market to be in significant contango in the coming months.

Pictured: LPG storage tanks; archive image
Source: Itsuo Inouye/AP/Shutterstock 

Focus article by Shruti Salwan

Clarification: Replaces price graph