European butane markets absorb rising US supplies

The US is the world’s leading supplier of liquid petroleum gases (LPG) or natural gas liquids (NGLs). Around half of all propane and butane is exported and it is increasingly finding a home in Europe. Total US exports of propane and butane were around 1.4 million barrels per day in 2019, up 15% from 2018. Europe-bound exports of propane and butane in 2019 were around 300,000 barrels per day, up 7% in a year versus 2018 according to the US Energy Information Administration (EIA). Demand for heating as well as for petrochemical feedstock is fuelling the increase. Volatility in the butane and propane markets has seen increased trading volumes in the futures markets as companies look to exchanges, like those at CME Group, to manage their price risk exposure.

Chart 1: European LPG prices – propane and butane

Source: Argus Media

US exports to Europe compete with Norwegian and Algerian supply

The largest suppliers to the 27 member countries of the European Union are traditionally Algeria and Norway accounting for around 450,000 barrels per day in 2019, up 10% from a year earlier according to the latest data from Eurostat.

Chart 2: European import volumes by supplier

Source: Eurostat

US exports to European countries (including Turkey) are rising fast. According to the EIA, exports were 66,000 barrels per day in 2019, which is around 37% higher than 2017 exports. US producers have announced plans to increase butane exports during 2020 further strengthening supply volumes, although these plans may be jeopardized by the impact of COVID-19. The Targa Resources Butane export facility in Galena Park, Texas was scheduled to increase butane exports by around 100,000 bpd by the third quarter of 2020 to a total of 330,000 barrels per day.

Demand in North African countries such as Egypt and Morocco has also increased, in part due to the heating properties of butane. This has seen exports to these countries rise from all the major suppliers. The US has benefitted from the rise in demand from the region (see table below). North African imports are typically hedged in the futures markets by international traders, and this is expected to increase the total volumes of European butane futures. US exports to North Africa have been rising to meet increased demand.  EIA data shows that 15% of total butane exports from the US was shipped to North Africa.

Table 1: US butane exports by destination*

  2017 2018 2019
World 4,290,425 6,312,502 7,045,444
Japan 489,841 839,449 1,029,421
South Korea 634,052 631,192 810,880
Indonesia 210,511 626,787 708,324
Morocco 312,993 341,142 624,007
Egypt 189,141 132,911 428,511

* butanes, liquefied (excl. of a purity of >= 95% of n-butane or isobutane)

Source: EIA data

It is also worth noting that exports from the US to Asia have also risen sharply since 2017. According to data from the EIA, the largest buyers are Japan, South Korea and Indonesia, accounting for 36% of total exports. Total exports to Japan, South Korea, Indonesia were 2.5 million tons in 2019 compared to 2 million tons in 2018.

European butane futures volumes grow

As a result of shifting export flows, liquidity in the butane futures markets is increasing. CME Group offers a comprehensive US and European butane and propane futures slate to enable clients to manage price risk. Based on exchange data, total trading volumes in 2019 were 2.5 million tons (2,500 lots of futures) compared to around 1.8 million tons (1,800 lots of futures) in 2018. Expectations are that trading volumes will rise as butane becomes a more significant product, given the supply increases coming from regions like the US.

Chart 3: European Butane monthly futures volumes

Source: Exchange data

Propane futures remain strong

Traded futures volumes in the more mature LPG paper markets remain strong. CME Group data shows that in European propane futures (CME Group commodity code PS) and the propane futures spread to naphtha (CME Group commodity code EPN), total volumes were just under 28 million tons (28,000 exchange-traded lots) in 2019, up from 21.7 million tons (21,700 exchange traded lots) in 2017. Traders typically trade propane as a spread to naphtha as this reflects the way that the petrochemical companies trade as they alternate feedstock supply depending on the relative price of both naphtha and propane.

Butane futures also trade as a relationship to naphtha, reflecting feedstock switching from end-users in the market. Expected higher demand for butane coupled with increasing flows from supply regions such as the US and elsewhere should have a positive impact on the volumes being hedged in the futures markets.

Chart 4: European Propane futures volumes

Source: CME Group data

Butane as a traded liquefied natural gas product is expected to increase, driven in part by increased usage in chemical cracker feedstocks as well as in heating applications. Growing export flows of butane are expected to increase their usage of risk management tools such as futures to manage price risk volatility. US flows will play a pivotal role in the further development of the market. Exports from the US already account for around 25% of European imports, positioning the US well to capture any future growth in butane demand. New demand centres in north Africa are also emerging and these will bring new opportunities for traders in the LPG markets.

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