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US-Asia LPG Arbitrage Improving On More Supply, Price Uptrend In East

Mar 25, 2016

The arbitrage economics to move US spot LPG to Asia are improving after being shut for most of this year, with a few cargoes being fixed for loading in April to move East, trade sources said this week. 

This was made possible by a stock buildup at Mont Belvieu; Enterprise Product Partners -- the largest LPG export terminal operator in the US exporting at capacity; and the uptrend in Asian CFR prices to near three-month highs. 

These are helping to push down prices in the US relative to the East, while the discount of Asian naphtha to US LPG prices have also deepened as naphtha moved up more in tandem with the rise in crude oil. 

Shipping sources said Shell on Tuesday booked two VLGCs to load cargoes from the US Gulf Coast around April 21 and April 25 for the journey to Asia. 

According to cFlow, Platts trade flow software, one of the ships, Clermont, is now in the Maldives vicinity and is due to arrive in Houston April 20. The VLGC Constitution is currently off Cuba, according to cFlow. 

Spot cargoes from the US are also being shipped to Europe, keeping that region amply supplied, traders said. 

"LPG prices are up, but not that much," said a market source. "So, primarily it is Asian naphtha that has been the driver for the arbitrage. 

"The market around US cargoes that I'm looking at now is improving a bit, so hopefully liquidity will improve a bit," another market source said. "The arb is definitely more open, helped more by the build in Mont Belvieu stocks last week." 

A Western trader said the arbitrage was wider, "but we cannot say it's opened." 

The widening spread between LPG and naphtha in Asia was also seen in the Argus Far East Index propane swaps versus the Mean of Platts Japan naphtha assessment, as the prompt month was at minus $41/mt Thursday, compared with a slight discount and even a premium around early February, Platts data showed. 

FOB Mont Belvieu propane was assessed Wednesday at 44.75 cents/gallon ($233.15/mt), while CFR Japan propane was at $351/mt, making for a spread of $117.85/mt -- wider than $80/mt on March 11, data showed. 

Taking into account the Houston-Japan VLGC rate of $68/mt, the premium between CFR Asia prices and Mont Belvieu is $49.85/mt, or 9.6 cents/gal. The break-even value of making the Houston-Asia arbitrage work is 7 cents/gal, a Western trader said. 

US STOCKPILES SHOW TENTATIVE RECOVERY 

After rising in the week ended March 11, for the first time since December 25, total US propane and propylene stocks declined 274,000 barrels to 62.2 million barrels in March 18 week. Propane represents about 95% of stocks compiled by the EIA in the propane-propylene inventory. 

The largest draw was in the Gulf Coast stockpile, which shed 410,000 barrels to 42.4 million barrels, EIA data showed. The East Coast, Midwest, Rockies and West Coast had stockbuilds, though the Midwest build was just 3,000 barrels. 

Production rose by 10,000 b/d to 1.69 million barrels, 168,000 b/d more than the same time last year. The EIA's export estimate remained at 632,000 b/d. 

One market source said the build up in the week before last could have been helped by BP's cancellations of two 55,000-mt cargoes. 

But Erik Nikolai Stavseth from shipping brokerage Arctic Securities said: "Firstly, I see cancellations as negative, as it really means that the buyers were not able to piece together a viable trade. So, when stocks are higher at Mont Belvieu due to cancellations, it's sort of a negative to me. 

"I think you'll see the arbitrage remaining open, if only marginally, as long as the oil price holds up. This will incentivize higher production in the US and support a switch to LPG in Asia versus naphtha." 

Stavseth said Enterprise indicated at an investor event this week that LPG exports from their terminals alone stood at 467,000 b/d, or 14.5 million mt/year, in first-quarter 2016, up from an average of 299,000 b/d , or 9.2 million mt/year in 2015. 

Enterprise has sold at capacity under long-term contracts equal to 460,000 b/d and is now at full contracted capacity with an additional 70,000 b/d of open capacity, he said. 

Marcus Hook on the US East Coast this week exported its first VLGC cargo and the East Coast is expected to see some 4.8 million mt of additional export capacity once Sunoco is operational with its new export facility in Q1 2017. 

"While the bottleneck has never been a shortage of export capacity, we still find US LPG exports at risk due to lack of available volume for exports," Stavseth said. 

He cited the Enterprise CEO as saying the company was seeing declining production in all areas except Marcellus and Permian. 

EUROPE WELL SUPPLIED 

Healthy arbitrage supply and limited fresh end-user demand kept the Northwest Europe refrigerated propane cargo spot market balanced this week. 

"The [propane large cargo] market is relatively well supplied, that's why the front is being pushed down," a market participant said. "More than two VLGCs are due to come from the US to Europe in April, buyers will have the upper hand," he added. 

A Europe-based end-user said: "It is still relatively easy to get propane. Looking at paper, it still feels like there is a weight on the market ... if supply comes from outside Europe in April, then physical cargoes should trade at a discount." 

According to cFlow, the Hellas Poseidon sailed from Houston on the US Gulf Coast on March 9, and was due to arrive in Terneuzen, in the Netherlands, Wednesday, while the BW Aries left Houston on March 16 and was due to arrive in the Netherlands on March 30. 

The BW Birch and the Polar were expected to bring US propane to petrochemical end-users in the Netherlands and in UK, respectively, with arrivals likely to be in the last decade of April. BW Nantes was planned to come from the US to Europe in April, with one of its destinations likely to be Sines in Portugal and also the West Mediterranean.