Saudi Aramco's move to hike its September Contract Prices for propane and butane by $155-195/mt indicates it is short of LPG for export as its supply is increasingly diverted to the kingdom's growing petrochemical sector, traders said Wednesday.
Some market sources cautioned the high CPs would be too costly for end-users already grappling with a slowing global economy and limited demand, and could trigger a price correction.
Saudi Aramco Tuesday set its September Contract Price for propane at $970/mt, up $195/mt from its August CP, and butane at $930/mt, up $155/mt from August. The propane CP was above market expectations of $940-950/mt.
It is the second month in a row that Saudi Aramco has raised the CP for propane and butane, after hiking both August CPs to $775/mt, from $575/mt for propane and $620/mt for butane in July. It is also above the CPs for September last year at $790/mt for propane and $865/mt for butane.
Platts assessed September propane and butane CP swaps at $964/mt and $917/mt Tuesday, up $149/mt and $117/mt, respectively, from August 2.
The September CPs are near April's $990/mt for propane and $995/mt for butane. The CPs hit a record peak in March at $1,230/mt for propane and $1,180 for butane, before sliding for four straight months to a 33-month low in July.
"I think the Saudis are sending a signal to the market that propane is short in their system, thus the higher posting," a European trader said.
An industry source said Saudi Aramco might limit its September export to two cargoes, having already sold one 44,000 mt parcel for end-September loading at $930/mt, which was heard to have been taken by Swiss trading house Glencore. This compares with four lots for August and up to 11 spot cargoes of 44,000 mt each for July.
"Aramco can squeeze out one more cargo for September," the source said, adding it has a cargo of 33,000 mt of propane and 11,000 mt of butane on offer from Yanbu for which a buyer was bidding for $970/mt.
"The situation is expected to be tight for the rest of the year and it will depend on the performance of the petrochemical sector and the entitlements under term basis," the source added.
MIXED FORECASTS FOR 2012 EXPORT VOLUMES
The source said Saudi Arabia produces around 23 million mt/year of LPG, with 15-16 million mt expected to be consumed by its own petrochemical industry this year. Exports for 2012 were estimated around 8 million mt, just above last year's 7.7 million mt, the source added.
However last December a source with knowledge of the matter said total export volumes were expected to fall to around 6.5 million mt in 2012, including term and spot cargoes, despite production being forecast to rise to more than 24 million mt due to an increase in crude oil output.
A Platts survey in June showed that Saudi Arabia raised crude output to 10 million barrels/day in May, versus an average of 9.1 million b/d over 2011.
Saudi Arabian LPG exports have slid in recent years as the kingdom increasingly uses LPG as a cheap cracker feedstock for its burgeoning petrochemical industry, and it has surrendered its position as top LPG exporter to Asia Pacific as Qatar, UAE and Iran boost output and shipments.
The market is also concerned at present about tight supply from Qatar due to a planned shutdown of its LNG train 5 for 40 days' maintenance next month, which some traders estimated would involve 100,000 mt of LPG. Qatari state marketing firm Tasweeq normally sells an average of 19 to 20 full cargoes a month on a term and spot basis.
This comes as the North Asian winter is approaching and stocks in Japan were low at the end of July.
Some traders said that even in a weakening global economy, current high LPG prices would hit demand. "It's a matter of whether end-users can afford such high flat prices," a trader said.
"Actually the European propane market already corrected last night. But I reckon Asia may have a slower reaction, which may happen next week, as Glencore may still be in the market to bid for H1 October today," he added.
Northwest Europe spot propane prices slipped about $26/mt Tuesday, tracking weaker swaps as end-users were sidelined, even though spot North Sea availability was still seen tight for September, traders said.
Industry sources said Saudi Arabia's petrochemical sector itself may be struggling with slowing global demand, which may impact production, pointing to data from Saudi stock exchange Tadawul that showed a 14% drop in the kingdom's Petrochemical Industries Index in the second quarter.
This was in line with the fall in net income of almost all Saudi petrochemical companies in Q2 -- especially sector giant Sabic -- due to falls in sales volumes and a relative rise in feedstock costs.
