The butane arbitrage from the US to Europe, and in particular the Mediterranean, has suddenly closed due to surging Mont Belvieu butane prices, trading sources said Tuesday.
"The big change from last week in the butane Med market is the closure of the arb from the US for December and January, which means there will be less product coming from the US in January," a Europe-based LPG trader said.
According to the trader, market participants that planned to load in December would not cancel their cargoes, but there may be zero butane cargoes loading in the US next month compared with the usual two Large Gas Carriers per month sailing across the Atlantic to supply the Mediterranean.
December barrels of normal butane on the US Gulf Coast were again trading higher Tuesday morning at $1.025/gal, a two-year high.
Non-LST butane, reflecting prices at the Enterprise terminal in Mont Belvieu, Texas, was last assessed higher at 102.75 cents/gal on November 19, 2014. S&P Global Platts assessed it at 98.625 cents/gal on Monday.
Market sources have said two major players have been buying, either for export or to cover a short.
"I don't see the exports as open at current levels," a Gulf Coast trader said. "It must be some short covering. The strength has surprised me."
Still others have suggested someone could be pricing a cargo.
"I'm unsure on what is being priced but that is what it smells like," a source said.
A shipbroker observed more split cargoes, 22,000 mt of propane and 22,000 mt of butane, being exported in December, a shift from the typical VLGC cargo containing only low-ethane propane.
The spike in December butane made for a 13.5 cents/gal backwardation, which steepened from 11.25 cents/gal the previous day. Butane's market structure has been backwardated since October.
Butane demand tends to increase in the winter as eased environmental RVP requirements allow for more of the high-octane, high-RVP blendstock into the gasoline mix.
Additionally, tight isobutane supplies due to extended isomerization unit maintenance from October to early December may have pressured butane higher, steepening the market backwardation earlier this month.
Looking forward, the lack of arbitrage could lead to a tightening of the Mediterranean butane market.
"Mont Belvieu prices are stronger, so the arbitrage is closed from US to Europe for butane but [one trading company] is bringing a LGC of butane from Mexico so they should be able to cover their Med shorts," a second Europe-based LPG trader said Tuesday. The Med butane market was looking balanced to tight, with limited spot availability but no huge amount of spot demand, the trader said.
The West Mediterranean spot mixed butane market was assessed at $484/mt Tuesday, up $7 from Monday, and assessed at around 103% of CIF NWE naphtha cargoes, stable day on day.
