The United States is the world’s leading supplier of Natural Gas Liquids (NGLs) with propane being one of the largest products. The U.S. Energy Information Administration (EIA) data shows that exports have also risen to record levels. Petrochemical cracker demand for propane has been rising on the back of additional propane dehydrogenation (PDH) capacity in China, which processes propane and converts it into propylene. China also reduced the import taxes on U.S. NGLs following the imposition of the higher taxes during the U.S. trade tensions. Naphtha prices have also been more directly impacted by the rising cost of crude oil. As a result, higher flows of propane are seen moving from the U.S. into the European and Asian markets. Volumes rebounded year-to-date in May 2022, indicating a growing demand for price risk management in a more volatile market.
Futures volumes continue to grow as U.S. exports rise
The U.S. is the largest propane producer and a significant exporter to the international markets. As trade flows continue to evolve, so has the use of financial risk management tools to manage the price exposure between the U.S. and the international propane markets. Trading volumes in the locational basis spreads are increasing between the U.S, Asia, and Europe, which also reflects the growing cargo movements between regions.
Mont Belvieu is the largest storage area for natural gas liquids in the world and is utilized as the price reference point for NGL markets in North America. Trading volumes in the Mont Belvieu LDH Propane (OPIS) futures surged 25% to reach a total of 2.5 million contracts in the 12-month period up to and including April 2022 compared to the same period 1-year earlier in 2021.
Chart 1: Mont Belvieu propane futures volumes remain robust
U.S. propane exports grow internationally
Asia demand continues to drive the increase in propane exports from the U.S. Propane consumption as a petrochemical feedstock has increased globally due to robust propylene demand, a key feedstock for the plastics supply chain. According to data from the EIA, Asia-Pacific accounted for 49% of U.S exports, followed by the America’s at 28% and Europe at 25% as of March 2022, respectively. U.S. trade flows into Asia increased on the back of a reduced arbitrage between the Middle East and Asia for much of 2021 and 2022.
Chart 2: Propane Exports by Destination
European propane prices discount to naphtha
Europe is a highly competitive market, where petrochemical industry participants actively switch between propane and naphtha as a feedstock. Between October 2021 and May 2022, European propane traded at ever steepening discounts to naphtha, which has been more heavily influenced by the rising cost of crude oil. This has seen the price spread between both products become more volatile. CME Group futures data showed that the price of European propane traded at over $145 per metric ton discount to the price of naphtha in May 2022 compared to a discount of just $39 per metric ton only six months earlier. At the same time, the price of crude oil rose to over $110 per barrel on a combination of factors related to the Ukraine war and the resulting shortages in supply.
Chart 3: European propane trades at steeper discounts to naphtha
The increased volatility in the market has prompted a growth in futures volume for Europe, Asia, and in the futures spread between European propane and naphtha. The propane to naphtha futures spread is actively traded by commercial firms to manage the price relationship between both markets. Futures trading volumes in the propane to naphtha spread increased 35% year-on-year between 2021 and 2022 (to May) with total volumes reaching 6,300 contracts per month or 6.3 million tons. Traded volumes in the European propane futures increased 12% with the Far East Index futures volumes rising 21% over the same period.
Chart 4: International propane futures volumes rebound
Europe sees higher flows of U.S. propane
The latest data from the U.S. EIA shows that a total of 5.9 million barrels per day were exported to northwest Europe in the past 12-month period to February 2022, an increase of 900,000 barrels per month on the same period 12 months earlier. The U.S. appears well placed to benefit from these changes with total exports having risen to a record level of 6.58 million barrels per day in April 2022. This is attributed to an increase in domestic production of propane and upstream crude along with expanded export capacity in the U.S. Gulf Coast. Around 24% of total propane exports were sold to European markets in February 2022, according to the latest available EIA data. This compared to around 12% in Q3 2021. U.S. flows have also been rising into the Asian markets, notably China with volumes reaching around 10% of total U.S. exports in February 2022 compared to just over 7% the same period one year ago.
Chart 5: US Propane/Propylene international exports hit record high
U.S. exports to Asia have also remained robust with total exports of propane and reaching 22.5 million barrels per month, just under 59% of total exports over the 12-month period to February 2022, EIA data showed.
Propylene production in Asia pulls in more propane
Over the past few years, China has built several propane dehydrogenation plants (PDH) to process propane into propylene. Argus Media noted that the total PDH capacity in China was around 12 million tons per year at the end of March 2022. This represents around 63% of total Chinese propane imports. China accounted for around 10% of total U.S. propane exports in February 2022 compared to just over 7% the same month one year earlier. On a volume basis, China imported 3.3 million tons of propane in February 2022, which accounted for around 40% of total imports.
Chart 6: China imports propane for propylene production
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.