General index, Crude Oil Data

Global Market Analysis, 29 April 2022

This week's analysis looks at the European LPG market and what's been effecting it over the recent, unpredictable months in the global energy markets.

Maintenance rather than Russia isolation guides European LPG short-term S&D outlook

By Virginia Bridgewater

LPG in Europe is entering a relatively quiet period after the volatility of the past few months.

A hot market in March on the back of the winter season meant a profitable Q1 for many, as delivered large cargo propane prices hit highs of almost $1,000/MT on 8 March, before plummeting more than $200/MT in light of a certain amount of market chaos, not least because of wild crude fluctuations. This volatility has made way for a more cautious approach as the weather warms and the market tries to evaluate the longer-term effects of the conflict on LPG prices.

General Index, LPG curves

Overall the LPG sector in Europe has not been anywhere near as severely affected by the conflict as crude and natural gas markets.

In fact, it is maintenance in the North Sea that is having a greater impact on supply and demand in the market in northwest Europe right now, rather than the effect of the conflict. Maintenance at Mongstad in Norway means little to no production throughout May while Braefoot Bay in the UK has seen a lighter than usual May loading programme of 40,000 MT instead of the usual 60-70,000 MT.

Overall high exchange and finance costs are leaving little appetite for risk in the paper market while on the physical side large cargo propane values remain at a premium to the swap.

With the arbitrage from the US firmly closed Europe is likely to see further tightening during May. This is illustrated by Equinor appearing in the spot market as a buyer on both propane and butane in the past couple of weeks. As a result butane has fluctuated from the low 90s as a percentage of naphtha to as high as 100% in the past week.

The propane-naphtha spread remains around minus $130-150/MT which is keeping crackers maintaining steady propane cracking, thanks in part to a traditionally higher reliance on Russia for naphtha.

General Index, ProNap

Russia exported just over 3mn MT of LPG to northern Europe in 2021, much of it via railcar into eastern Europe. This used to be much higher when the overall volume of exports included up to 1.5mn MT via seaborne routes into northwest Europe from the Ust Luga transshipment terminal on the Baltic coast. But those seaborne cargo volumes dropped significantly once product began to be used to feed domestic petrochemical facilities as more came online in Russia several years ago.

Although European countries close to Russia such as Finland, Poland and Hungary are forced to turn to the west for much of their product, many existing railcar contracts from Russia into, for example, Germany are still being honoured while no formal sanctions are in place.

Poland, which usually imports more than 1mn MT per year on railcar from Russia, has been seen buying waterborne cargoes from the North Sea since Russian supplies dropped off. And because most of the LPG in Poland goes into the Autogas sector, other fuels can be substituted if necessary. As many have pointed out, even though the US arbitrage is closed for now, it only takes a couple of US VLGCs to make up a significant shortfall into northwest Europe.

Zulfadhli Kader
Virginia Bridgewater, LPG Pricing Director
Register to receive more articles like this one via email, as well as all the latest news from General Index.