It has been an unusual year for the oil market. Gasoline, usually a blessing for sentiment in the summer, has been lacklustre throughout June and into July. On the other hand, wintertime performers like propane and butane have seen incredible strength over the past month. Diving deeper into the latter, let’s first speak of NGLs as a whole.
Natural gas liquids (NGLs) are components of natural gas that, when cooled, separate into liquids and are then used to make vital products such as ethane, propane, butane, or pentane. A noteworthy proponent of their usage comes from wintertime heating, due to which their demand tends to ebb in the summer.
Let’s take US butane, for instance. Normal butane, also known as C4 ENT, tends to inflate in the winter due to rising demand for various reasons, such as heating fuel. In addition, the wintertime gasoline blending pool adds more butane to gasoline due to its boiling point, which increases its Reid Vapor pressure (RVP), allowing the fuel to evaporate at low temperatures. Due to this rise in usage, butane is characteristically known to inflate in the winter and become cheaper in the summer.
Figure 1. Forward Curve for the US Normal Butane Contract (c/gal). Source: Onyx Capital Group
This year, however, US butane unseasonably rallied in June. We saw the Aug/Sep C4 ENT spread climb from -0.50c/gal on 10 June to +0.125c/gal on 19 June.
In addition, the August contract for the differential between n-butane and US Mont Belvieu (LST) propane rallied from 13c/gal on 12 June to 17.50c/gal on 21 June.
While butane spreads tapered off following this high, they remain strong compared to propane, prompting an investigation into why n-butane witnessed this incredible rally in mid-June.
A look into US butane
US butane was well-bid at the end of May but began on a bearish foot in June, with the Jul/Aug C4 ENT spread dropping from –0.50c/gal on 30 May to –0.75c/gal on 01 June. This weakness emerged due to a well-supplied market and limited demand from gasoline hedgers, who exited the market as the gasoline market spiralled downwards. Following this, US butane found more support amid a well-supported propane market.
The petrochemical industry has been critical to the strength of the propane market. Propane competes with naphtha, another refined oil product, as the feedstock of choice for crackers. While cracking propane produces ethylene and propylene, cracking naphtha produces these products along with other products such as butadiene (BD), toluene and xylenes. Because of this, petrochemical players tend to prefer working with naphtha over propane. However, naphtha prices skyrocketed early this year amid geopolitical shocks such as the Houthis attacking vessels in the Red Sea and Ukrainian drone attacks on Russian oil infrastructure.
Due to this, the front-month differential between Asian FEI propane and MOPJ naphtha (FEI/MOPJ) plummeted below -$100/mt at the end of April. Around this time, the same contract in NWE (NWE ProNap) weakened to -$185/mt. Usually, when the propane-naphtha spread dips below -$60/mt, it makes more financial sense for petrochemical players with flexible plants to crack propane over naphtha.
While opting for propane cuts down on other products like butadiene, another way to produce this, albeit less efficiently, is through butane.
Butadiene
1,3 – Butadiene is a non-corrosive, flammable, colourless gas used to produce synthetic rubber – which is widely used to produce shoe soles, adhesives, and tyres and is the basis for objects such as nylon. The most significant butadiene yields are normally derived from the butane fraction as a function of cracking heavier feeds such as naphtha. Alternatively, butane can be made by the dehydrogenation of n-butane, although this tends to yield lower amounts of butadiene.
Perhaps due to these limitations to butadiene production, butadiene prices have persistently increased in Europe and Asia, causing the Northeast Asian butane margin to rally significantly. Northeast Asia is a vital region that is dominating butadiene demand amid the region’s role as a major manufacturing centre for cars and tyres.
This increase in profitability and demand for butadiene would translate into US butane due to the region’s prowess as a butane exporter. The EIA reported a dramatic rise in US exports of normal butane this year, with April 2024 recording this level at 547kb/d. Looking deeper into these exports, China, Japan, and South Korea made up 30% of all exports.
Figure 2. Source – US EIA, Onyx Capital Group
Figure 3. Source: US EIA, Onyx Capital Group
We now see weaker economic data from Asia and Europe that may pressure manufacturing appetite in these regions and, thus, downstream butadiene demand. For instance, Germany’s industrial production fell by 2.5% in May, against a forecast rise of 0.2%. More detrimental to the Northeast Asian butadiene margin, China’s economy has been slumping amid a beleaguered property sector. The country’s GDP only grew 4.7% in Q2’24 (prev: 5.3%), its slowest level since Q1’23. This weakness may filter into US butane, with the front C4 ENT spread trading at -0.50c/gal on 15 July.
In addition, this current butane-flation may disturb the usual winter-time gasoline hedging demand for butane. Gasoline blenders will soon decide whether to use butane in their winter-spec blending and while it is economical for them to use butane, it may not be if gasoline continues to plummet while butane skyrockets. Therefore, it will be interesting to see if supply tightness in butadiene and still-expensive naphtha will keep butane prices propped up, although we may have to see the butane bulls wrestle with the twin forces of sluggish demand and market correction to keep the party going.
