Global propane prices surge again Tuesday amid low US stock levels

Quantum Commodity Intelligence – Bullish pressure continued to build in global propane prices Tuesday morning ahead of this week's key US inventory report Wednesday that will signal if stocks are starting to climb quickly enough ahead of winter.

Key spreads between propane and naphtha tightened another $5-$6/mt overnight in both European and Asian markets.

In northwest Europe, the balance-month July discount for propane versus naphtha cargo paper narrowed to -$16.75/mt Tuesday morning up from -$21.75/mt on Monday 1630 London time, while August narrowed to -$17/mt from -$22/mt, Quantum data showed.

In Japan, the balance-month spread between propane and naphtha cargoes has swung over the last week from a discount for propane to a premium, as traders price in slowing supply from the US.

The premium for propane climbed to $13.50/mt at the Singapore close, up from $8.50/mt Monday 1630 London time, while August was $19.50/mt, up from $13.50/mt.

The same spreads for propane against naphtha were in negative territory at the end of June, with July around -$14/mt and August around -$7.50/mt.

Global propane prices and cracks against Brent have surged over the last few weeks, and backwardation widened in the nearby curve amid growing concerns low stock builds in the US will leave the market facing a shortage of barrels in October, when inventory levels are expected to peak.

Increased demand for LPG from the petrochemical sector and as a substitute for LNG in certain situations where it is more cost-effective has helped top up demand, but US stock levels have been the "main story...and it will be that way for a few more weeks," said one market source.

"We are going to need to see stock builds of up to 3 million barrels a week (in the US) from here on in if we are going to get to usual levels of between 95 and 100 million barrels (in the US) by October," said another source.

"We only saw around 1 million last week."

US propane/propylene stocks built 1.2 million barrels to 57.5 million barrels over the week to June 25, according to the Energy Information Administration.  

In 2019, stock levels reached 75.9 million barrels by June 28 and topped 100 million barrels by early October.

This year's pattern is similar to 2018 when US propane/propylene stocks only built to around 85 million barrels, sources noted, although that was considered low in recent years.  

But the sharply narrowing spread between propane and naphtha in Europe could signal a turning point, making the gas uneconomical for steam crackers.

Without the pull from petrochemicals, US propane exports should start to fall.

"There is a lot of export barrels locked in the paper, but we are already seeing a lack of demand for spot export barrels, and we have reached the point of cancellation (cargo) economics," a source said.

"One usually US exporter has bought back a cargo, so they obviously think it is better to have tons on the jetty currently."

Jitters about the US stocks have filtered along the nearby curve, and the fourth quarter paper has been highly volatile recently, although on low liquidity, sources added.

In northwest Europe, the backward spread between July and October propane cargo paper has widened to $7.5/mt.

In mid-June, the spread was still in mild contango of -$2.

"Fourth quarter paper has shot up, but I am sure there is plenty sitting on the sidelines to short it if US stocks start to build quickly enough," said one source.

Spot cracks for propane cargoes in northwest Europe versus Brent rose to around -$24/b Monday, up from a low of -$31/b mid-June.