There's much talk about the impacts on the oil market when OPEC+ supply restriction actions are carried out. However, behind these movements, there's a profound impact on the refined products market, with propane production being a prime example. With less oil being supplied by OPEC+ countries, whose extraction process also results in propane production, American companies have had an opportunity to increase their exports, growing on average by 14%, which is about 1,6 million bpd, over 2023.
On the one hand, there has been an opportunity opening up on the supply side; on the other, the demand outlook is quite promising. Manufacturing activity, closely associated with propane demand, is picking up, as evidenced by the latest PMI data for the United States at 49.1 (+2) and Europe at 46.6 (+2.2). Moreover, Asia, the primary destination for US propane exports due to its petrochemical complexes, is expected to benefit from a less restrictive monetary environment in 2024. For now, propane exports since the beginning of this year have shown modest growth (+1%) compared to last year, but this is due to transportation challenges imposed by the lower water volume in Lake Gatun, significantly reducing trade in the region, an important route for American LPG production to Asia.
While propane inventories remained at record levels for much of 2023, a result of the strong increase in production, the weather reminds us how volatile the energy complex can be and how quickly its fundamentals can change. Due to the severe cold in the United States in January, there was a significant increase in heating demand. Furthermore, the low temperatures that affected the country halted oil and natural gas production in many regions, causing the country's stocks to plummet rapidly, dropping from approximately 81 million barrels of propane/propylene at the beginning of the winter to approximately 55 million barrels (-35%) by February 16th.
Of course, these changes have impacted spot propane prices in Mont Belvieu, where prices are on average 4.15% higher (an 11% increase compared to the 5-year average) than those compared to 2023. In this sense, the primary fundamental for propane – the weather – takes a bearish direction as we approach the end of winter, reducing the need for heating. However, there are other important fundamentals that can impact the price of propane, as we mentioned before. OPEC+ may have a significant influence in the coming months.
Despite a promising outlook for propane demand, oil and natural gas production in the United States has been experiencing a significant increase, leading to a greater supply of gases as LPG products. Therefore, it will be important to observe the performance of oil throughout 2024. If it manages to reach higher levels, this will result in higher costs for its refined products, which include propane.
However, there are significant challenges in the medium term. Although the Fed has not yet begun the process of easing its contractionary monetary policy, high interest rates in the American economy are supporting a strong dollar, which makes energy commodities more expensive for holders of other currencies, something bearish for the energy complex. Additionally, the trend is for the OPEC+ supply cut to remain in effect, but it is expected to be gradually reversed between the third and fourth quarters of this year. Therefore, in the medium term, propane prices are expected to converge to lower levels than current ones.
