Martha Dowding

Martha Dowding is a Research Associate at Onyx Capital Advisory. Prior to joining Onyx Martha completed her studies at Newcastle University where she studied Chemical Engineering and gained experience in writing comprehensive research reports.

Propane… More Like Pro-pain

4 min read
Oil pump jacks at sunset sky background. Toned.

The difference between the American and Asian propane benchmarks this year has been stark. In the US, propane is mostly used for heating homes, cooking, and fueling vehicles. In Asia, there’s a similar domestic use, but it’s also in high demand for industries, like manufacturing plastic and agriculture. Plus, it’s crucial in rural areas where natural gas isn’t available. 

The Asian propane benchmark (FEI) has been extremely weak in Dec’23 and Jan’24. The Asian propane demand was faltering as 2023 ended, on the back of both warmer weather (China had its hottest year on record in 2023), and poor industrial demand for making plastic. Propane crackers are used to break down propane into smaller molecules, like propylene and ethylene, which are used in manufacturing plastics mainly.

The profit margin for cracking had fallen significantly and there was poor propane demand, seen by physical selling of 1H, and then 2H selling at a discount as operating rates in the region were as low as 60%, amidst negative production profits. Fundamentally, there is more demand anticipated, with a combined 7.26 million mtpa of new PDH units expected to start up by the end of 2024, with 3 units in East China starting by the end of Q1’24. The demand from petchem players may be expected to pick up due to not only the low outright FEI levels but the low levels in the FEI/MOPJ diff in particular. We have begun to see this as FEI strength seems to have been absorbed well by FEI/MOPJ this week.

LST (The Mont Belvieu US propane benchmark), on the other hand, not only gathers more strength from a strong crude but has seen a significant rally into Feb. Physical premiums for LST have been well bid although this week, the US physical has seen a far more mixed performance. The strength in US propane seems somewhat disconnected from the fundamentals until there are bullish fundamentals which serve to further bolster price action. Production in the US is back up, from the hampered generation following the cold snap earlier this year, this same factor also suggests demand should be less strong, as seen in the 691kbbls decrease in implied propane/propylene demand in the US released in the week to Feb 7.

More bullish stats were seen this week, with the 93kbbls increase in implied demand which caused a short covering rally and we saw a bigger-than-expected draw of 3.7mbbls in Propane. Strength was funneled into April, with Apr/Mar LST trading as high as 5c/gal. The continuation of this US strength appears disconnected, as production is online, and levels are extremely high.

The diametric strengths of Asia and American propane can be shown well in the LST/FEI diff. This has seen an extraordinary rally, to highs of $105/mt on Feb 2. Since then, the price has been more subdued as the most extreme aspects of the respective extremes have come off. The US is a net exporter and Asia is a net importer of propane. The supply disruptions of the limit on cargoes passing through the Panama Canal may have been overstated. These extremely high bids for propane to pass through, and cut the line, helped contribute to weaker FEI premiums. However, as we anticipate demand to pick up in Asia with stronger cracker operating rates it is important to consider the added length to the journey to Asia as cargoes pass around the Cape of Good Hope (since the Panama Canal continues to be untenable). This may further limit supply to burgeoning demand and support FEI further. We have seen good buying in the front 2 FEI spreads in addition to growing selling from trade houses in the front LST spreads. When Chinese players return from the Lunar New Year, there may be greater confidence in Asian propane in light of stronger demand and extremely low levels.

Weather forecasts in the US are, predictably, inconsistent. Some channels point to the Gulf Stream bringing in warmer temperatures but there are simultaneously reports of a ‘false spring,’ not to mention the Groundhog Day groundhog, Phil, failing to see his shadow, suggesting an early spring is on the way. It is important to mention, however, that even in the pessimistic El Nino forecasts for the States, the worst of the weather impacts remain in the North of the country rather than close to Mont Belvieu in the south.

The risk/reward is skewed to the downside and the fundamental demand picture seems to be shifting. It may be a new year, new Asian propane regime so watch flows closely on the Onyx COT dashboard to see any players taking profit on their length in LST/FEI and greater bullish flows in FEI once players return next week.

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Martha Dowding is a Research Associate at Onyx Capital Advisory. Prior to joining Onyx Martha completed her studies at Newcastle University where she studied Chemical Engineering and gained experience in writing comprehensive research reports.