Healthy demand for butane in Asia as well as a lack of re-supply from the Persian Gulf has strengthened US Gulf Coast spot prices for the gas since the end of 2016, thereby making the trans-Atlantic spot arbitrage prohibitively expensive and further accentuating the tightness in the European butane complex.
The Asian butane premium to propane has surged to the highest level in more than three years on the back of firm demand from Southeast Asia and India, coupled with supply tightness in the Middle East.
On the demand side, robust appetite for butane and propane has emerged from India and Indonesia. Indonesia's state-owned Pertamina has been actively buying evenly split cargoes in the spot market since January, seeking one 44,000-mt cargo comprising 22,000 mt propane and 22,000 mt butane each month. India was also seeking more refrigerated mixed cargoes than usual amid strong domestic demand.
The strong appetite for butane came amid cutbacks in supply from the Middle East, fueling worries that supplies were unable to meet Asian requirements.
Spot availability has almost totally dried up in the Middle East because of cuts in crude oil production, which started in January.
"[Our exports are] affected a little bit due to crude cuts. Our LPG is produced as an associated gas from crude and with crude cuts, LPG production has been affected," a source with Saudi Aramco said.
Aramco did not sell any spot LPG cargoes for loading between January and March. Before the cutback in crude oil output, the producer sold two cargoes each month in November and December 2016, the source said. Each refrigerated cargo is 44,000 mt in size.
Qatar Petroleum was heard to have sold one spot clip in February, with nothing heard done for January and March so far, down from late 2016 when Qatar had at least one to two spot clips a month to offer, trade sources said. This could not be confirmed with QP.
As a result of the cut in crude oil production, Kuwait Petroleum Corp.'s LPG production has decreased by about 10%, a source with knowledge of the matter said. The company has not sold any spot cargoes since January.
"OPEC [-led] cuts are affecting our safety stock situation. We are not participating in any spot tender," a source with a Persian Gulf producer said.
While the export cutbacks were for both propane and butane, the tightening effect on butane was more significant as heavy exports of propane from the US were able to make up for the shortfall in Asia. On butane however, the US did not have as much volumes to export, because of strong domestic demand for gasoline blending.
Reflecting strength, the FOB AG butane premium to propane surged to the highest level in more than three years, reaching $105/mt on February 10, and remaining at this level to date, according to S&P Global Platts data.
The spread was last wider on December 13, 2013, at $110/mt, and has more than doubled since the beginning of the year, when it was $50/mt on January 3.
C+F Japan butane was assessed at $612.50/mt at the Asian close Wednesday.
USGC BUTANE FLOWS EAST
As a result of the increased pull from Asia, USGC butane has strengthened since December, when prices spiked to 15-month highs on a combination of exports, short-covering amid a thin market with traders on Christmas holiday.
The butane strength persisted into February, spiking to a three-year high of $1.3875/gal in early February.
Market sources have pointed to Asian export demand as the main driver behind propane and butane strength this winter.
A US-based shipbroker said he would estimate about 50% more split LPG cargoes -- 22,000 mt each of butane and propane aboard a VLGC -- loading from the USGC this season, compared to previous winters.
"The Arabian Gulf is getting tight. I think the Saudis and others are having trouble supplying enough volumes to their customers," he said.
The US Energy Information Administration does not release weekly butane inventory reports, as it does for propane, but its most recent data showed butane and butylene stocks at 45 million barrels in November 2016.
Weekly US stocks of natural gas plant liquids and liquefied refinery gases, excluding propane, fell 1.25 million barrels to 104.38 million barrels in the week ended February 10, but remained about 21.73 million barrels above levels at the same time last year, likely due to increased ethane recovery from the natural gas stream. Non-propane NGL inventories started 2016 at 97.73 million barrels, peaking at 151.12 million barrels in early September before shedding about 31 million barrels to end the year.
Platts Analytics Bentek show butane inventories estimated as low as 18.2 million barrels and as high as 30 million barrels as of February 3.
February butane and butylene inventories fell to 20.67 million barrels in 2016, according to monthly EIA data. Two years earlier, February inventories were at 16.88 million barrels.
February non-LST normal butane, reflecting barrels at the Enterprise terminal in Mont Belvieu, Texas, fell 9 cents Wednesday to $1.1525/gal, or $522.085/mt. VLGC freight rates were unchanged at $30/mt from Houston to Northwest Europe and $60/mt to Chiba, Japan.
TRANS-ATLANTIC ARBITRAGE SLAMMED SHUT
Strong spot prices for butane to load from the USGC have made the trans-Atlantic spot arbitrage difficult to work on paper since the end of 2016.
Flows into Northwest Europe have not been economic to work since December, while the arbitrage into the Mediterranean somewhat recovered in early January before taking yet another hit from a spike in USGC butane prices as February approached.
This has seen refrigerated butane cargoes for delivery in Northwest Europe tighten considerably. Refrigerated butane cargoes were assessed at $478/mt CIF NWE Wednesday and at 95.2% of physical naphtha.
The large cargoes have been hovering around the 95% mark since early February. The last time the large butane cargoes were previously assessed at this relative strength versus naphtha was on January 28, 2014.
But also, the Mediterranean market has been impacted by the lack of re-supply from across the Atlantic, as supply from within the region was scarce at the same time.
"Product is hard to find," one European market source said, adding "the February arbitrage from the US is definitely closed for now."
According to the source, this spot arbitrage route is not likely to open up in the short term.
The lack of spot availability in the Mediterranean comes amid healthy incremental buying interest both in the west and east of the region due to colder weather.
Platts assessed butane at $618/mt FOB basis Lavera Wednesday and at 123.1% of physical naphtha. This is the strongest value versus naphtha since February 19, 2016, when butane coasters FOB basis Lavera were assessed at 124% of physical naphtha.
