LPG PRICES IN AN INCREASINGLY VOLATILE MARKET

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1 Information Analytics Expertise JUNE 214 LPG PRICES IN AN INCREASINGLY VOLATILE MARKET 18 th Annual Asia LPG Seminar Ronald L. Gist, Director IHS / ALL RIGHTS RESERVED

2 LPG PRICES IN AN INCREASINGLY VOLATILE MARKET / JUNE 214 Topics for Today What happened to propane prices in early 214, and why (?) What about butane prices? IHS Forecast of Monthly LPG Prices Through 215 Factors to Monitor 214 IHS 2

3 LPG PRICES IN AN INCREASINGLY VOLATILE MARKET / JUNE 214 Weekly propane prices in the US have been very volatile Weekly prices for propane in the US were stable during 213 through the summer, but then started to rise slowly in September Propane prices then rose quickly during December through mid-february Prices in the Mid-Continent soared to nearly $3.5 per gallon in January Prices then quickly returned to the typical range Inventories help explain these volatile prices Cents per Gallon USGC Propane Price Mid-Continent Propane Price IHS 3

4 LPG PRICES IN AN INCREASINGLY VOLATILE MARKET / JUNE 214 US propane stocks fell rapidly but were rebuilt quickly Propane prices soared during the winter because primary inventories of propane were pulled down to record low levels in only three months Million Barrels Prices subsequently fell as inventories were rebuilt rapidly Market factors that contributed to these large inventory swings include: Rising US production Reduced cracking rates by ethylene plants Severe weather Fluctuating waterborne exports million barrel deficit US Propane Stocks 213 Average Stocks Minimum Stocks US Propane Stocks 214 Jan Feb Mar Apr May June Aug Sep Oct Nov Dec 214 IHS 4

5 Rising production by US gas plants were beneficial for the propane market Average production of propane by gas processing plants increased by about 1, bd during 213 This rising production helped reduce the initial propane stock drawdown and also helped rebuild stocks 2,6 2,4 2,2 2, 1,8 1,6 1,4 1,2 1, LPG PRICES IN AN INCREASINGLY VOLATILE MARKET / JUNE 214 Thousand Barrels/Day Butane (normal + iso) Propane Ethane 1, bd increase ` 8 Ethane Rejection Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Jan IHS 5

6 Additionally, lower propane cracking rates by ethylene plants helped stabilize the market LPG PRICES IN AN INCREASINGLY VOLATILE MARKET / JUNE 214 Propane was an economically attractive ethylene plant feedstock in early 213 due to its relatively low price Thus, crackers used about 7, bd more propane during the first three quarters of 213 However, when propane prices started to rise, ethylene plants reduced their use of propane by about 1, bd 2, 1,8 1,6 1,4 1,2 1, 8 6 Thousand Barrels/Day Ethane Propane Normal Butane Light Naphtha +7 Mbd --1 Mbd 4 2 Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Jan IHS 6

7 LPG PRICES IN AN INCREASINGLY VOLATILE MARKET / JUNE 214 However, winter weather was unusually severe in the US during January through March One reason for the rapid drawdown of propane inventories was the unusually severe winter weather in early 214 (the Polar Vortex ) Heating Degree Days AVG The weather was also responsible for unusually high propane demand for crop drying due to: 1) a record high corn crop, and 2) rain during the harvest This severe weather was the straw that broke the camel s back regarding propane prices, but inventories started falling in the October because.. BASE TEMP. = 65 F JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC 214 IHS 7

8 LPG PRICES IN AN INCREASINGLY VOLATILE MARKET / JUNE 214 Because waterborne propane exports soared in 213 Propane stocks also dropped because waterborne exports of propane nearly doubled during 213 Arbitrage values were attractive because prices in the US were significantly lower than in other parts of the world Also, the capacities of the two existing waterborne export terminals were both expanded during , 12, 1, 8, 6, 4, Thousand Barrels/Month Propane (monthly) Propane (annual) Butane (monthly) Butane (annual) 2, Jan-7 Jul-7 Jan-8 Jul-8 Jan-9 Jul-9 Jan-1 Jul-1 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul IHS 8

9 When US propane prices jumped, differentials between asia and the US narrowed Propane price differentials between Asia and the US dropped from $375 per tonne (72 cents/gallon) during 213 to only $13 per tonne (19 cents) in February LPG PRICES IN AN INCREASINGLY VOLATILE MARKET / JUNE 214 Price, $ per Tonne 12 Differential, $ per Tonne Belv - Japan Differential 1 Spot Propane, Japan Propane, Mont Belvieu Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Jan IHS 9

10 LPG PRICES IN AN INCREASINGLY VOLATILE MARKET / JUNE 214 The propane price differential between the US and NW Europe also narrowed rapidly As propane prices in the US started to increase, the price differential relative to NW Europe plunged from an average of nearly $3 per tonne (56 cents/gallon) during 213 to only $4 per tonne (9 cents/gallon) in February Price, $ per Tonne Belv - NWE Differential Propane, NW Europe Propane, Mont Belvieu Differential, $ per Tonne A relatively mild winter in Europe also contributed to lower prices in the region Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Jan IHS 1

11 With no arbitrage incentive, waterborne propane exports dropped sharply When price differentials for propane in the US relative to other regions collapsed, waterborne exports dropped from nearly 12 million barrels per month during the fourth quarter of 213 to only 8.5 million barrels in February Exports subsequently rose when the price incentives improved 14, 12, 1, 8, 6, LPG PRICES IN AN INCREASINGLY VOLATILE MARKET / JUNE 214 Thousand Barrels/Month Propane (monthly) Propane (annual) Butane (monthly) Butane (annual) 4, February 2, Jan-7 Jul-7 Jan-8 Jul-8 Jan-9 Jul-9 Jan-1 Jul-1 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan IHS 11

12 Lessons learned from this past winter LPG PRICES IN AN INCREASINGLY VOLATILE MARKET / JUNE 214 The US propane market can shift quickly High exports can cause prices in the US to rise High US prices will reduce cracking rates by domestic ethylene plants High US prices will reduce exports to other regions Part of this rebalancing mechanism affects the international market 214 IHS 12

13 LPG PRICES IN AN INCREASINGLY VOLATILE MARKET / JUNE 214 Topics for Today What happened to US propane prices in early 214, and why (?) What about butane prices? IHS Forecast of Monthly LPG Prices Through 215 Factors to Monitor 214 IHS 13

14 LPG PRICES IN AN INCREASINGLY VOLATILE MARKET / JUNE 214 Butane production by US gas plants rose by only 4, bd in 213 Gas processing plants in the US produced about 4, bd more butane (normal butane plus isobutane) in 213 than in 212 2,6 2,4 2,2 2, Thousand Barrels/Day Butane (normal + iso) Propane Ethane 4, bd increase [ for reference, propane production increased by about 1, bd ] 1,8 1,6 1,4 1,2 1, ` 8 Ethane Rejection Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Jan IHS 14

15 Normal butane peak stocks have been rising LPG PRICES IN AN INCREASINGLY VOLATILE MARKET / JUNE 214 Despite the rather modest increases in production, normal butane peak inventories increased during the last three years Stocks in 213 peaked about 1 million barrels higher (2%) than the historical peak Thousand Barrels 6, 5, 4, 3, 2, 1, Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Jan IHS 15

16 Normal butane prices in the US stayed weak while propane prices rose High inventories have depressed normal butane prices for two years LPG PRICES IN AN INCREASINGLY VOLATILE MARKET / JUNE 214 Price, $ per Tonne When propane prices rose rapidly during the winter, normal butane prices were flat The typical seasonal increase in normal butane prices from summer to winter was muted in N-Butane, Mont Belvieu Propane, Mont Belvieu Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Jan IHS 16

17 LPG PRICES IN AN INCREASINGLY VOLATILE MARKET / JUNE 214 Waterborne butane exports have not increased appreciably Thousand Barrels/Month The waterborne export terminals in the US have the capability to export butane as well as propane Nonetheless, butane exports have not increased much, whereas propane exports have increased substantially for five consecutive years Why the difference? 14, 12, 1, 8, 6, 4, Propane (monthly) Propane (annual) Butane (monthly) Butane (annual) 2, Jan-7 Jul-7 Jan-8 Jul-8 Jan-9 Jul-9 Jan-1 Jul-1 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan IHS 17

18 Price differentials between the US and Asia for butane were much lower than for propane LPG PRICES IN AN INCREASINGLY VOLATILE MARKET / JUNE 214 Arbitrage values between the US and Asia were less profitable than shipments of propane Price, $ per Tonne Belv - Japan Differential Spot Butane, Japan N-Butane, Mont Belvieu Differential, $ per Tonne $3 - $6 for Propane Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Jan IHS 18

19 LPG PRICES IN AN INCREASINGLY VOLATILE MARKET / JUNE 214 Arbitrage values for US shipments of butane to Europe were only $2 For the last two years, butane prices on the US Gulf Coast were only $1 to $2 per tonne less than in NW Europe Price, $ per Tonne 12 Belv - NWE Differential Butane, NW Europe 11 N-Butane, Mont Belvieu 1 Differential, $ per Tonne During this same period, price differentials for propane between the US and NW Europe were in the range of $2 to $5 Thus, it was much more profitable to export propane than butane $2 to $5 for Propane Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Jan IHS 19

20 LPG PRICES IN AN INCREASINGLY VOLATILE MARKET / JUNE 214 Topics for Today What happened to US propane prices in early 214, and why (?) What about butane prices? IHS Forecast of Monthly LPG Prices Through 215 Factors to Monitor 214 IHS 2

21 LPG PRICES IN AN INCREASINGLY VOLATILE MARKET / JUNE 214 Crude oil prices are expected to decline through 215 IHS short-term forecast calls for global prices for crude oil to generally decline through 215 Due to surplus supplies in the US, the discount for WTI crude oil prices relative to Brent crude oil should widen. (Analyses by IHS show that the discount would narrow if the current restriction of crude oil exports from the US are eliminated.) Because crude oil prices have a strong influence on LPG prices, we anticipate that prices for propane and butane will also decline, but with typical seasonal fluctuations Dollars per Barrel WTI WTI Forecast Brent Brent Forecast Wider Differential Jan-5Jan-6Jan-7Jan-8Jan-9Jan-1Jan-11Jan-12Jan-13Jan-14Jan IHS 21

22 Waterborne exports of propane and butane from the US can both increase LPG PRICES IN AN INCREASINGLY VOLATILE MARKET / JUNE 214 Our short-term supply/demand balances for propane and butane in the US show that waterborne exports of propane and butane can increase without creating shortages Capacity expansions at the existing waterborne export terminals will facilitate these higher exports 18, 16, 14, 12, 1, 8, Thousand Barrels/Month Monthly Propane Waterborne Exports Monthly Butane Waterborne Exports Additional normal butane exports would help pull down the current high stocks However, waterborne exports of propane and butane will not occur unless the price is right relative to other regions our price forecasts call for adequate differentials 6, 4, 2, Jan-9 Jul-9 Jan-1 Jul-1 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul IHS 22

23 LPG PRICES IN AN INCREASINGLY VOLATILE MARKET / JUNE 214 The arbitrage between Asia and the US for propane should return to recent values Due to declining global prices for crude oil, LPG prices are expected to decline in all regions 1,2 1,1 1, Price, Dollars per Tonne Belv - Japan Differential Forecast Differential Propane, Mont Belvieu Propane, MB Fcst Spot Propane, Japan Diff'l, Dollars per Tonne Price differentials between Asia and the US should return to about $2 to $25 per tonne Asia should be a slightly more attractive market than NW Europe for propane exports from the US Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Jan-14 Jan IHS 23

24 LPG PRICES IN AN INCREASINGLY VOLATILE MARKET / JUNE 214 The arbitrage for propane between NW Europe and the US should narrow from previous highs Propane prices in the US during last winter were too high 1,1 1, Price, Dollars per Tonne Diff'l, Dollars per Tonne Thus, our price forecast calls for price in the US to decline faster than in NW Europe But the price differential will likely not grow to much more that $2 per tonne to prevent excessive exports Seasonal swings with higher exports during the summer could develop Jan-5 Jan-6 Belv - NWE Differential Differential Fcst Propane, Mont Belvieu Propane, MB Fcst Propane, NW Europe Propane, NWE Fcst Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Jan-14 Jan IHS 24

25 LPG PRICES IN AN INCREASINGLY VOLATILE MARKET / JUNE 214 Butane prices in the US should remain lower than in Asia IHS expects that future butane price differentials between the US and Asia will be about $2 - $25 per tonne 1,1 1, 9 Price, Dollars per Tonne Diff'l, Dollars per Tonne These incentives for butane are similar to the Asia/US arbitrage for propane These incentives are slightly higher than the arbitrage to Europe, but freight costs will also be higher Due to strong demand in the US for gasoline blending during the winter, arbitrage values should fluctuate seasonally Belv - NWE Differential Differential Fcst N-Butane, Mont Belvieu N-Butane, MB Fcst Butane, NW Europe Butane, NWE Fcst Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Jan-14 Jan IHS 25

26 LPG PRICES IN AN INCREASINGLY VOLATILE MARKET / JUNE 214 Butane prices in the US should maintain about the same differential to NW Europe We expect that butane price differentials between the US and NW Europe will remain in the range of $2 per tonne 1,1 1, 9 Price, Dollars per Tonne Diff'l, Dollars per Tonne The price differentials for Asia should be slightly wider However, due to lower freight cost for butane to NW Europe than to Asia, butane should preferentially move to Europe Belv - NWE Differential Differential Fcst N-Butane, Mont Belvieu N-Butane, MB Fcst Butane, NW Europe Butane, NWE Fcst Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Jan-14 Jan IHS 26

27 LPG PRICES IN AN INCREASINGLY VOLATILE MARKET / JUNE 214 Topics for Today What happened to US propane prices in early 214, and why (?) What about butane prices? IHS Forecast of Monthly LPG Prices Through 215 Factors to Monitor 214 IHS 27

28 LPG PRICES IN AN INCREASINGLY VOLATILE MARKET / JUNE 214 What could affect the market (and our forecast)? Crude oil prices: Higher or lower crude oil prices would affect global LPG prices However, the regional LPG price differentials would probably not change as much US inventories of both propane and butane: Propane inventories in the US need to continue to be rebuilt if stocks become low, propane prices would ultimately rise and would deter exports (NOTE: propane stocks are reported weekly) Conversely, normal butane stocks need to be pulled down (butane stocks are only reported monthly, and lag behind by two months) Global petrochemical markets: Propane and butane are used internationally as feedstocks for ethylene production a weak petrochemical market would tend to put downward pressure on LPG prices whereas a strong petrochemical market would support prices Shipping costs: recent freight rates soared to historical highs, which affect arbitrage values 214 IHS 28

29 Thank You For Your Attention I look forward to your questions 214 IHS 29

30 About This Presentation This presentation has been prepared for the sole benefit of attendees at the 214 Asia LPG Seminar. Neither the presentation nor any part of the presentation shall be provided to third parties without the written consent of IHS. Any third party in possession of the presentation may not rely upon its conclusions without the consent of IHS. Possession of the presentation does not carry with it the right of publication. IHS conducted this analysis and prepared this presentation utilizing reasonable care and skill in applying methods of analysis consistent with normal industry practice. All results are based on information available at the time of review. Changes in factors upon which the review is based could affect the results. Forecasts are inherently uncertain because of events or combinations of events that cannot reasonably be foreseen including the actions of government, individuals, third parties and competitors. NO IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE SHALL APPLY. 214 IHS 3

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