U.S. propane oversupply unlikely to be absorbed by global demand

Global demand for U.S. propane and butane is unlikely to increase in the near term, as demand in the residential and petrochemical sectors remains weak and supply from the Middle East continues to grow.

U.S. supply of the two fuels has been growing since 2010, as by-products of expanding natural gas processing and crude oil refining. Supply has far exceeded domestic demand, with more than half of U.S. production now exported.

Expansion projects at U.S. propane export terminals in 2019 and 2023 have allowed U.S. exports to increase by more than 700,000 barrels per day between 2018 and 2024, according to the U.S. Energy Information Administration (EIA) shown in the chart above.

U.S. propane exports averaged a record 1.85 million barrels per day in December 2023, the highest since the EIA began collecting data in 1973.

“Increased exports resulted from the highest propane price spread between the U.S. Gulf Coast and East Asia in a decade due to petrochemical and space heating demand,” according to a report from the EIA.

Meanwhile U.S. butane exports hit a 20-year high of 547,000 b/d in April 2024, following 10 years of growth since 2014.

The markets for butane, propane and Liquified Petroleum Gas (LPG) are heavily interconnected. Both butane and propane are exported as standalone products, and as LPG, which is a mixture of the two fuels in varying concentrations.

Propane demand

Of the East Asian importers, China is by far the biggest source of propane demand, largely as a feedstock for its petrochemicals industry. Propane is shipped to China as a standalone product and as LPG. China has been growing its capacity of propane dehydrogenation (PDH) units, which convert propane into propylene — an intermediate product used in plastics production and other materials.

Although Chinese imports of propane from the U.S. are still relatively strong, they have not been large enough to dent U.S. inventories, which reached a 15-year high of over 100 million barrels in September 2023, according to data from the EIA.

Many PDH units in China are now struggling with narrow margins, due to weaker-than-expected propylene demand.

“End-user demand for downstream petrochemical products needs to increase for LPG demand from China to be higher than currently expected,” says an LPG market report from shipping firm Poten & Partners released earlier this year.

Butane demand

Global butane demand is largely driven by India. India is the second largest importer of LPG after China. India’s residential market mostly favours butane, although some butane demand can be displaced by propane depending on the price differential between the two fuels. Propane demand is also growing thanks to the fuel displacing some natural gas demand in India’s tile manufacturing sector.

The Indian government repeatedly released subsidies for LPG ahead of elections earlier this year, spurring increased residential demand.

LPG imports are forecast to grow 2.7% year-over-year to 18.5 million tonnes in 2024, and again to 19.8 million tonnes in 2025, according to a report from shipping firm Poten and Partners.

This growth in demand will largely by met by the Middle East, which accounted for 93% of India’s LPG imports in 2023, according to a report from the Observer Research Foundation.

Future potential

The most promising near-term solution to reduce the oversupply of U.S. propane stocks is to boost demand for propylene. The Chinese government has announced new stimulus measures for its property sector, which some in the market see as a positive development.

But China has begun to invest in naptha-based steam crackers, which are likely to take an increasing share of petrochemical demand away from PDH units in the second half of this decade.

The recent oil market report from the IEA sees the combined LPG production surplus of the United States and Canada rising steadily from 2.7 mn b/d in 2023 to 3.1 million b/d in 2030 “as continued growth in production outstrips demand gains centred on the petrochemical industry.”

While overall LPG demand is expected to grow by 1.7 million b/d between 2023 and 2030, two-thirds of this demand will come from markets east of Suez, where freight costs from the Middle East are lower than those from North America. An expected uptick in supply from the Middle East thanks to Saudi Arabia’s Jafurah gas field and Qatar’s North Field Expansion project will compound the problem.