Open US arbitrage to ease NWE supply pressure

The return of a workable arbitrage from the US when demand peaks in Europe is vital this year as local output is expected to be capped, writes Peter Wilton

A recent weakening in US propane prices and the reopening of the arbitrage to northwest Europe should facilitate vital flows into the region this year, alleviating refinery supply pressures.

US propane flows to northwest Europe were stunted until as recently as October 2021 owing to long-held US inventory concerns that had elevated Mont Belvieu prices on the Gulf coast. As winter approached, supply fears in Europe grew as a result and were exacerbated by lower expectations for local supply as a result of increased refinery consumption of LPG as natural gas prices soared. But US propane values retreated sharply towards the end of last year after reaching seven-year highs in October as stock concerns dissipated. US propane inventories remained below historical averages but US retailers' pre-winter purchases left them well covered as winter began mildly.

The arbitrage to northwest Europe duly swung open - netbacks flipped to an average of $12/t in the fourth quarter from minus $11/t in the third - markedly shifting 2022 forecasts. Northwest European imports from the US hit a five-month high of 339,000t in November 2021 before hitting 551,000t in December, up from just 160,000t a year earlier and 296,000t in December 2019, Argus data show.

The return of a workable arbitrage from the US as and when European demand peaks is especially vital in 2022 as local output is expected to be capped. Refinery capacity in Europe has been hampered by full and partial closures, mothballing and conversions in the wake of Covid-19. Around 4.6pc of the region's refining capacity, or 722,000 b/d, in 2020 will be lost by the end of 2022, Argus forecasts. Globally, around two-thirds of LPG is primarily produced from upstream gas processing and a third from refining, but in Europe, refineries account for more than 70-75pc of supply.

Surging and sustained high natural gas prices have additionally led to refineries consuming the relatively cheaper LPG they produce in place of natural gas. This had the effect last year of at times inverting typical market patterns, as refiners bought LPG on the spot market to fulfil their contractual obligations. High gas prices also incentivised gas suppliers to leave as much LPG in their natural gas streams as possible, reducing the fractionation of natural gas liquids (NGL).

Russian exports remain muted by historical norms, although they are expected to rise slightly this year. Feedstock use at petrochemical producer Sibur's Zapsibneftekhim complex in Siberia has resulted in LPG shipments from the Baltic Sea terminal of Ust-Luga dwindling to 500,000 t/yr from nearly 2.5mn t/yr as recently as 2018. These factors combine to leave Argus' forecast for northwest European LPG supply at just below 24mn t in 2022, up by around 500,000t from 2021 and unchanged on 2020, but down by 10pc from the pre-pandemic 26.4mn t in 2019.

Plastic sponge

Demand is expected to fall slightly this year because of reduced use as autogas, limiting the impact of lower regional output. But Argus forecasts Europe's net import requirements to rise to 14.9mn t in 2022 - from 13mn t in 2021, 11.5mn t in 2020 and 13.2mn t in 2019. The northwest European petrochemical sector - the region's flexible LPG market - will soak up the majority of the additional transatlantic tonnes meeting this net short.

Argus forward curves show propane at discounts to naphtha across 2022 - averaging around 90pc, or about minus $60/t outright - and increased arbitrage flows will only widen this. Argus forecasts LPG flows to the petrochemical sector at 15.2mn t in 2022, up from 12.4mn t and 13mn t in the past two years when propane was often at a premium to naphtha. The petrochemical market's share of total European demand is projected to hit 39pc in 2022 - an all-time high.

EU-16 refining utilisation