Oil price crash, threat of rise in crude production loom over US LPG exports

10:53 AM | March 10, 2020 | OPIS staff

The collapse in crude oil prices over the weekend has exacerbated challenges facing an already oversupplied liquefied petroleum gas (LPG) market in the US, with the threat of increased oil production by Saudi Arabia and Russia to potentially add millions of barrels of LPG to export markets.

The end of winter in the US is expected to trigger the traditional decline in LPG prices regardless of external factors. But this year, the situation was top-heavy even before the weekend, with the situation particularly grim in PADD 3, the main exporting region of the Gulf Coast. Propane-propylene inventories in PADD 3 as of 28 February stood at 50.9 million bbl, according to the US Energy Information Administration (EIA), 45.4% higher than the 35 million bbl seen in storage for the corresponding week in 2019. New fractionation capacity to the tune of 1.4 million b/d is scheduled to be added in PADD 3 by the middle of 2021, with this projected to push a corresponding increase of LPG into the supply pool.

With domestic demand for LPG expected to remain flat, exports are the main avenue for the US to reduce its supply overhang. However, waterfront infrastructure constraints mean that all of the burgeoning surplus cannot be siphoned off.

The events over the weekend add a new dimension to these well-reported challenges. Observations from natural gas liquid (NGL) market watchers highlighted a number of major themes, including that increased Saudi crude oil production implies increased LPG production. These barrels are expected to vie for market share with burgeoning US supplies.

As a rule of thumb, 1.8 million metric tons/year of LPG production is associated with 1 million b/d of crude oil production, according to Yanyu He, executive director/NGLs at IHS Markit. If Saudi production were to ramp up to its capacity of 12 million b/d from its recent pre-weekend level of around 9.7 million b/d, this could imply an annualized increase of some 4 million metric tons in total worldwide LPG supply.

This comes when worldwide demand could be compromised for a prolonged period over concerns about the coronavirus disease 2019 (COVID-19). “The normal wisdom that ‘the cure for low prices is low prices’ may not hold true this time. Low US prices would not automatically imply more overseas demand, because this is a global price phenomenon,” says one market commentator. Narrowing propane export margins from the Gulf Coast to Asia through February despite falling freight corroborate this fact.

The scaling back by petrochemical companies in Japan and South Korea of their naphtha cracker operations amid COVID-19 concerns has also caused a potential market for US propane to dry up.

Lower crude oil prices could also lead to lower crude oil production in the US but only gradually. During the 2014–15 oil price fall, the full reduction in shale production filtered through only after about a year, according to one expert. By this yardstick, the brakes might not be applied on crude oil production immediately; therefore, low NGL prices might not immediately inhibit the associated supply of NGLs either.

Reported Chinese interest in importing US LPG again could be a potential bright spot, but it could take several months for these flows to materially develop, and this would remain subject to how the COVID-19 outbreak plays out.

“The picture for LPG prices stateside was bearish before last weekend, and it is even more bearish now,” says one expert. This may imply a prolonged U-shaped recovery in LPG prices instead of a quick V-shaped one, he suggests.

How the US LPG export market responds to the potential increase in Saudi LPG production remains a question to be answered as the market continues to be business-as-usual so far. Last Friday, Saudi April propane contract price (CP) expectation was heard at around $360/metric ton and the indication plunged to as low as $260/metric ton on Monday, according to one market watcher, recording a drastic fall as Saudi Arabia revealed its plans over the weekend to slash its oil prices and increase oil production.

While it remains to be seen how this will impact the US LPG market, IHS Markit noted in its weekly report on Monday that “so far propane has lagged the crude price plunge, signaling hopes of China’s projected incremental demand for US supplies as a result of import tariff exemptions and the upcoming propane dehydrogenation [PDH] projects.”

“I think more bullish for US LPG down the curve on a risk basis,” says another source. At least four Chinese firms have been approved to import US LPG in a form of tariff waiver, restarting the US–China LPG flow.

However, another source was skeptical about the bullish idea for US LPG, noting that additional production of LPG anticipated from Saudi Arabia in association with higher crude oil production could take a bite out of US LPG economics. “When there is more Arabian Gulf LPG, it is inevitable to cancel US cargoes,” the source said. “US LPG may lose some competitiveness in the international market.”

Brent crude futures were floating around the $36/bbl level during early trading in London today.

This article includes reporting by Charles Kim, Rajesh Joshi, Jessica Marron, and Mary Welge.