Low inventories and climbing demand for propane in the US Gulf Coast has created an imbalance in Europe, closing the arbitrage from the US and keeping cargo prices in Northwest Europe high despite weak inland demand.
The CIF NWE large cargo price on Thursday was assessed at $445/mt, or 97% relative to the price of the CIF ARA naphtha cargo price, the highest level versus the traditional petrochemical feedstock since January 9, 2014.
The spread between front-month propane swap versus the front-month naphtha swap also narrowed to a $23.5/mt discount, the smallest discount since mid-December 2013.
That is largely due to the closed arbitrage to Europe, which has narrowed supply mostly to what is available in Northwest Europe, sources said.
"There are not a lot of cargoes coming in from the States, one or two per month," a source said. "That is not enough to keep the market ticking over."
That strength on CIF large cargoes in Europe has upended the typical seasonal pricing pattern, keeping prices too strong to attract demand from petrochemical buyers that typically buy during the summer dip in heating demand. A year ago large propane cargoes were assessed at just 77%.
US propane prices have spiked to their strongest summertime levels since 2011 on winter supply concerns. Exports have drawn down inventories to 2014 lows -- the year of the polar vortex winter, which saw increased residential heating demand due to freezing temperatures.
S&P Global Platts assessed August non-LST propane, reflecting prices at the Enterprise storage and fractionation terminal in Mont Belvieu, Texas, up 1.25 cents at 77.25 cents/gal Thursday.
Strengthening 2 percentage points to 67% of front-month crude futures, propane was at its strongest since February, when the US exported 928,000 b/d.
On Wednesday, weekly inventory data released by the US Energy Information Administration showed the smallest week-on-week inventory build of the summer at only 25,000 barrels.
"I think Mont Belvieu will get real tight," a shipbroker said. "If FEI [Far East Index] can outrun Mont Belvieu, then we might see big FOBs trading. I think the USGC can't maintain exports throughout the winter."
With propane exports averaging 945,800 b/d in the first five months of the year, total US propane inventories fell as low as 39.64 million barrels in mid-April, 29.3 million barrels below levels at the same time in 2016.
US inventories have grown since late April, but at 67.63 million barrels as of August 4, they remain 24.3 million barrels lower year on year.
Market sources have estimated inventories at 70 million-90 million barrels by the end of build season in the autumn. In comparison, stocks ended the 2015 and 2016 build seasons at more than 100 million barrels.
Earlier in the week, FOB Houston propane cargoes for loading in September were heard above the 4-4.5-cent/gal theoretical cancellation range, at about 5 cents/gal over cavern product, due to lower freight rates and increased Asian demand. Cargoes had dipped to 4.5 cents/gal over cavern product on Thursday.
Industry sources have reported four to nine cargo cancellations in August, and five to 11 in July. May and June each saw double-digit cancellations for a total for more than 20 cargoes. In canceling, a company opts to pay the terminal a fee -- sometimes as much as 50-75% of the cost of lifting -- rather than take the cargo to sell in a weak market.
That strength on the European propane cargo market has defied some market predictions that prices would start to soften through the summer. Now, some expect strong prices could carry straight into winter, when heating demand returns to the market.
