November 29, 2017 / 11:51 PM / a year ago

Rising U.S. propane exports to Asia widen heating-value spread

HOUSTON (Reuters) - Propane is trading at its widest premium to butane on a heating value basis in four years as strong U.S. exports combined with expectations of a colder U.S. winter than a year ago have tightened inventories.

U.S. consumers, who buy propane for home heating, are seeing costs this month up 17.2 percent from a year-ago, to an average $2.434 per gallon, according to U.S. Energy Information Administration data.

Demand for propane by consumers and chemical manufacturers, which use butane and propane to make plastics, is up sharply this year and U.S. stocks have declined despite rising production.

Propane exports averaged above 1 million barrels per day (bpd) in five months this year, according to ClipperData, compared with 770,000 bpd for all of last year.

The two fuels typically trade closely together but split as traders last month liquidated butane positions after it failed to rally and propane stocks unexpectedly rose, one trader said.

Propane on Tuesday was $11.04 per million British thermal units (mmBtu) and butane was $9.95 per mmBtu on a heating value basis at the Mont Belvieu, Texas, hub, a $1.09 spread and the widest since a 2013 cold snap in North America sent prices soaring.

“You’re seeing more abnormal price relationships because we’ve added all this propane-only demand,” said Joseph Sevick, research director at consultants Wood Mackenzie and a former trader.

Adding to propane’s premium: U.S. winter temperatures are forecast to be 13 percent colder on average than last year, according to the EIA’s Winter Fuels Outlook.

U.S. propane inventories this month were 73.15 million barrels, down 27 percent from 100.8 million barrels a year earlier, the EIA reported. Stocks typically build between April and October and fall in October as heating demand rises.

“I don’t think we’ve grasped the magnitude of how exports are going to be further drawing [propane stocks] down this winter,” said a trader, who believes the spread could widen as cold weather descends.

The United States produced 1.92 million bpd of propane in the week ending Nov. 24, up 11 percent from 1.73 bpd a year earlier, according to the EIA.

More than half of the propane produced in the United States is being exported today compared with just 10 percent in 2009, according to the National Propane Gas Association trade group. Butane exports are less than a quarter of those of propane, EIA data shows.

East Asian countries take more than 40 percent of exports, with Japan, South Korea and China among top buyers, ClipperData estimates.

On Nov. 28, the spot price of propane at the Mont Belvieu, Texas, hub was 100.5 cents a gallon and butane was 102.5 cents a gallon, according to Reuters Eikon data.

Reporting by Bryan Sims; Additional reporting by Devika Krishna Kumar in New York; Editing by Gary McWilliams and Tom Brown

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