Global trade flows of natural gas liquids (NGLs) are changing, and the U.S. producers appear to be one of the major beneficiaries of this shift. The U.S. exported a record volume of NGLs in 2022 with around 866 million barrels, which represented an increase of 3% on 2021 levels. Total U.S. exports have more than doubled since 2015, according to the U.S. Energy Information Administration (EIA). Volumes remained strong in January 2023, reaching 79.5 million barrels, the highest level since June 2022.
A larger number of cargoes have been exported to the European Union where existing flows from producing countries like Russia have been declining due to the continuation of the Russian war in the Ukraine.
These disruptions in existing trade flows as well as the new opportunities that have emerged have been beneficial for the continued development of the futures markets. Traded volumes in both the Mont Belvieu and European benchmarks rose sharply year on year in 2022. The trend is expected to continue into 2023 and beyond.
Chart 1: U.S. NGL exports reach record in 2022
Europe imports get off a strong start in 2023
European industrials imported around 13 million tons of natural gas liquids in January 2023, based on data from the U.S. EIA. The European import figure represented 16.8% of total U.S. exports. On an annualised basis, this could equate to over 156 million tons for 2023. In 2022, Europe imported 139 million tons, an increase of 18% year on year compared to 2021.
The largest buyers were Belgium, France, Italy, Netherlands, Norway, Sweden, and the United Kingdom with a combined volume of 106 million tons in 2022, a rise of around 36% compared to the imports in 2021, U.S. EIA data showed.
Chart 2: European NGL imports from the U.S. surge
Mont Belvieu makes further gains as a global futures benchmark
Mont Belvieu is the largest storage area for natural gas liquids (comprised of propane, ethane, butane, natural gasoline (pentanes), and iso-butane) and is utilized as the pricing benchmark for NGL markets globally. Trading volume in the ethane, normal butane, natural gasoline, and propane futures markets increased 4% year-on-year from 2022 to 2023. Year-to-date volume in 2023 increased 20% compared to the year prior.
Chart 3. Ethane, Normal Butane, Natural Gasoline, and Propane Futures Volume and Open Interest
Feedstock switching boosts European derivatives
The price of propane has continued to fall relative to the price of naphtha. This has resulted in more petrochemical crackers being incentivised to run more heavily on propane compared to naphtha due to improved cracking margin economics. This has also been supportive for propane futures volumes as more commercial firms turn to the derivatives markets to manage any associated price risk in propane.
CME Group data shows that total volume in the European Propane (Argus) CIF ARA cargo market, which is the main NGL-based derivatives contract for the European market, reached 1,750 lots per month (1.75 million tons of propane) in 2022, an increase of 13% compared to 2021 volumes. Year to date 2023 volumes through March have averaged over 2,000 lots per month, equating to 2 million tons of propane per month. The price of propane on a relative basis to naphtha continued to weaken and traded at around a $100 per metric ton discount in March 2023, the lowest level since the summer of 2022, CME Group data showed.
Chart 4: European Propane derivatives increase 13% year on year
Deferred contract volumes increase
The volume of trading activity in the futures market has also increased in the deferred contracts which highlight the effectiveness of the contract as a physical hedging contract for the underlying spot trade. Trading volumes in each of the contract month periods shown in the chart below have increased year on year since 2020. In the nearby contract months, referred to as “Spot-M2”, trading volumes increased 14% year on year between 2021 and 2022. Compared to the first three months of 2023, volumes in the nearby contract months jumped 21%. Similar trends can be observed in the contract months, showing that the liquidity is deepening along the forward curve.
Chart 5: EU propane liquidity extends down the curve
U.S. NGL production and demand increases
Growth in U.S. production coupled with an increase in export capacity have allowed the U.S. to become a leading supplier to the global market. Much of this higher output comes on top of a significant increase in the production of oil and gas to support global demand growth patterns.
Since 2008, NGL field production has steadily risen from an annual average of 1.8 million barrels per day to more than 6.0 million barrels per day in 2022 despite tough price environments in 2020. Ethane and propane are being driven primarily from increasing domestic and export demand for petrochemical feedstocks. The expansion of capacity of ethylene crackers, which use ethane as a feedstock has also contributed to this growth.
Chart 6: U.S. NGL field production breaks record in 2022
Europe replaces Russian NGL imports with U.S. cargoes
A tightening of the supply and demand fundamentals picture in Europe, complicated by the ongoing war in Ukraine, has led to a greater reliance on imports from outside the region. The U.S. is expected to play a pivotal supply role and volumes are set to increase in 2023 and beyond. Rising production should ensure that the U.S. is well placed to meet possible supply shortfalls from the more traditional suppliers to the European markets.
At the same time, Russian Liquefied Petroleum Gas (LPG) cargoes that were once destined for Northwest Europe are being redirected eastwards to countries like India and Turkey. Trade flows are expected to change further in 2023 as Russian sanctions continue to affect European buyers. These changes are expected to be positive for the U.S. Mont Belvieu benchmark from a pricing standpoint and follows a similar trend that has been observed in other U.S. energy markets.
Petrochemical demand sees LPG head to Europe
Eurostat data shows that total Liquefied Petroleum Gas (LPG) imports into the EU-27 member states reached 21.2 million tons in 2022 compared to around 19.8 million tons in 2021, an increase of around 7% year on year. It is expected that Europe will rely more heavily on imports into 2023, in part due to the declining volumes of Russian LPG exports into the region. Demand from the petrochemical sector is driving some of the demand increase, in part because LPG prices have fallen sharply relative to alternative feedstocks such as naphtha. Therefore, some producers are switching between both feedstocks to boost overall production margins of some key petrochemical products like ethylene and propylene.
Chart 7: European LPG imports increase as demand firms
Data from the UN Comtrade also shows that total Russian LPG exports to the EU-27 were around 480-million tons in 2022, a decline of around 18% from 2021 levels (total exports 567 million tons). Russian export flows are expected to fall further into 2023 following the EU wide ban on Russian refined product flows from February 5, 2023.
The U.S. has become a major producer of the most NGL products such as propane, butane and ethane and a significant exporter to the international markets. As trade flows continue to evolve, so have financial risk management tools to manage the price exposure between the U.S. and the international NGL based markets.
Global Natural Gas Products
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All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.