Swinging LPG market: An in-depth analysis from the price perspective

Fluctuating arbitrage to unfold an uncertainty for LPG shipping 

We expect the cuts to favour Middle East spot cargo bookings with more volumes flowing towards the Asia Pacific market, as traders are likely to prefer shorter-haul cargoes over long-haul ones from the US. Economics will also favour sourcing Middle East LPG for Asia, providing short term boost in shipping rates.

Despite the narrowing arbitrage, the US is expected to hold its ground in the Asian market with inflated production and increased terminal capacities; this will curb its terminal fees, capping a significant portion of US-Asia landed costs, keeping the arbitrage extremely narrow (High terminal fees impacted US-Asia arbitrage in 2024). The trade deals signed by the Trump administration, binding some countries to increase their purchase of US energy, will further protect its market share. Additionally, US LPG supply is propane-rich, highly sought by the expanding Asian PDH sector, mainly in China. 

However, LPG shipping rates are expected to face downward pressure in the long run, with higher Middle East-Asia flows, which will contract tonne-mile demand. Narrowing US-Asia arbitrage may trigger cargo cancellations, which is detrimental to vessel demand, especially when the fleet is in excess.  

Meanwhile, restrictions in Panama Canal transits will continue to force vessels to take the longer COGH route, tightening vessel supply on the US-Japan route. High spot rates on this route will favour Middle Eastern exports by tilting the arbitrage. 

Additionally, the ongoing tariff tensions have kept the share of the US in China’s imports low, further boosting demand for Middle Eastern supply. Subdued petchem margins in major Asian countries are also contributing to this weak demand. 

However, if Saudi CP continues to decline, US exporters may be compelled to follow suit. This could help restore petchem margins and stimulate demand, though much will depend on broader economic conditions and final product consumption. On the positive side, vessels reallocating to cash in on the arbitrage opportunity may curb vessel supply for short periods, creating episodes of uptick in spot rates.

A renewed Middle East-Europe trade flow?

With Middle Eastern LPG supply becoming competitively priced, European buyers may reassess their buying strategy. However, persistent security risks in the Suez Canal, subdued spot rates on the US-Europe route, lower Mt Belvieu prices and the need to reduce reliance on Russian LPG suggest that the US is likely to maintain its supply dominance in the European market. Consequently, a meaningful resurgence in Middle East-to-Europe LPG flows remains highly improbable. Nonetheless, recent reductions in Saudi CP could prompt a reassessment of Algerian Sonatrach and Mt. Belvieu prices, both of which have remained elevated.