Propane is in for a tough time

It’s been a tough Spring and Summer for U.S. propane markets. Netbacks from the international markets have come under severe pressure due to COVID-19. While prices bottomed out in March 2020, most benchmarks have still not recovered to year-ago levels, and export volume levels have only recently rebounded to year-ago levels. Looking ahead, we don’t see much good news in the near-term. Netbacks and arbs remain at low levels, lower crude prices are increasing naphtha’s competitiveness in Asian petrochemical markets, freight rates are trending higher, and propane storage levels in the U.S. are elevated. Propane may be in for a tough time for the next several months.

International propane netbacks have trended positive in recent months but aren’t safely above spot cancellation levels (which is close to MB + 2-3 cpg). Propane demand is highly seasonal, with Northern Hemisphere demand spiking in the cold winter months. We expect better export margins in the upcoming winter months. Still, propane exports will face significant headwinds.

In the petrochemical sector, Naphtha may continue to pressure near-term propane demand. Naphtha and propane substitute for one another, and with crude oil prices currently in the doldrums, naphtha is likely to be a competitive feedstock option for Asian crackers. Naphtha will continue to eat into propane demand, barring a rise in crude prices.

Rising freight prices also threaten U.S. propane exports and pressure U.S. propane exports. Freight prices have rebounded from lows seen in the early days of the pandemic; some indexes have nearly doubled but are still well below year-below levels and may have some room to run yet. If higher shipping costs materialize propane exports will face more challenging export netbacks and could be “out of the money.”

Perhaps the most important near-term factor weighing on propane prices is U.S. (and especially Gulf Coast) storage. Propane inventories at the national level and in the Gulf Coast (PADD 3) are elevated and may be drifting above 5-year highs.

On the other hand, propane days of supply remain well within 5-year averages, according to EIA calculations. There are about 87 days of supply according to the EIA, versus about 92 days in the same year-ago period.

Propane faces significant fundamental near-term pressures. Propane exports, which account for about half of all U.S. propane demand, will prove critical if propane prices are to recover. If U.S. is unable to maintain export levels around the 1.0 Million bpd mark, U.S. propane prices will need to adjust downwards to achieve that level. We suspect Mont Belvieu propane prices will come under pressure soon.