LPG outlook lifted by economic recovery and tight shipping market
LPG prices, specifically propane, have rallied in recent weeks. Propane prices in Asia are now trading above $0.90/gal, up from just $0.70/gal a few months ago. The rally has been driven by several factors including higher oil prices, economic recovery, colder Asian weather, and higher freight costs, according to Simon Hill, chief operating officer of Energy Trading Analytics International (ETAI).
First, prices have been propelled by the rally in crude as well as the spread between Brent and WTI. Second, the economic recovery and colder weather in Asia have increased demand, supporting higher US exports. Finally, a tight carrier market has been exacerbated by Panama Canal congestion. This has decreased effective freight capacity and forced some shippers to seek alternate routes, such as the Cape of Good Hope or Suez Canal, all adding price and duration to voyages. As the Panama Canal may place greater priority on containership and LNG carriers, there is potential for Canal issues to persist for LPG carriers at least over the next 3 months.
Against this backdrop, US LPG exports could surprise to the upside, Hill said. US LPG exports have been rising in recent months, hitting 5 million tons in December, which is near full export capacity. While some investors voiced concern over a slowing outlook for US production growth, Simon Hill noted that production has remained elevated compared to projections through 2020. Additionally, an Asian demand pull could keep exports elevated even if US NGL prices rise further.
However, Middle East exports may decline. In 2020, the Middle East exported around 35 million tons of LPG, compared to a total seaborne market of 110 million tons. Looking at 2021, recent OPEC cuts could put downward pressure on LPG exports and lead to increased domestic consumption. This could bring a decline of 4-5 cargoes exported out of the Middle East per month.
In addition, there remains potential for weakness coming out of the winter. While medium-term LPG fundamentals remain strong, the recent spike in prices may be overdone. Hill expects that as we move towards April and May, winter heating demand in Asia should decline, putting downward pressure on LPG prices.
On the midstream side, LPG export terminals are likely operating relatively close to capacity (subject to vessel scheduling) given the strength of current arbs and demand for cargos. Rates appear to around 5-5.25¢/gal, with few customers willing to term out capacity beyond one year. To the extent arbs remain elevated, Hill expects the export terminals to be beneficiaries of continued high utilization, but unlikely to see much in the way of higher rates.
