The butane market is finding itself in a rare surplus during prime winter-time gasoline blending season, creating high volatility in prices. But petrochemical buyers and export markets are ready to take advantage of the situation.
December has been a very volatile month for butane. After hitting an early-month high spot price of $1.415/gal, normal butane at Mont Belvieu non-TET storage locations traded as low as $1.295/gal. Prices have since rebounded to around $1.3725-$1.395/gal. The spread to January widened from around a 0.125ct- 0.25ct/gal contango to a 1ct/gal contango, indicating the market expects prices to rise in the future and a willingness to store barrels due to less current demand.
During the shoulder period when U.S. refiners begin to switch from lower Reid vapor pressure (RVP) gasoline to a higher RVP specification and normal butane can be added directly to the gasoline pool, normal butane inventories stood at an all-time record high of 58.9 million barrels as of September, according to data from the Energy Information Administration.
In the midst of the winter blending season, traders believe normal butane inventories are much higher than in previous winters. One Gulf Coast trader estimates that U.S. butane inventories at the beginning of December stood between 40 million to 42 million bbl, and stocks will draw about 10 million to 11 million bbl through the end of December. At the end of last December, U.S. inventories of normal butane stood at 28.5 million bbl.
EnVantage co-principal Peter Fasullo estimates inventories will end December somewhere around 30 million bbl. With regard to the EIA’s official inventory numbers, Fasullo says even those official numbers are like understated because the EIA subtracts from its gas plant production figures normal butane used in commercial isomerization plants along the Gulf Coast.
Of course, shale gas remains the main culprit in the oversupply situation. According to the EIA, natural gas plants produced 230,000 b/d of normal butane in September, compared to 185,000 b/d in January.
But refinery production is also adding to the situation. This year, refiners ran about 500,000 b/d more crude oil through their plants, according to Fasullo. With each barrel of crude yielding about 2% to 3% of butane, butane production at refiners has trended slightly higher this year.
During the March-September period when refiners typically cannot blend normal butane into their gasoline pool, refinery production was 211,000 b/d, according to the EIA. That compares to 195,000 b/d of production during the same period last year. Refiners likely went into the winter gasoline blending season with higher butane inventories and less need to buy from butane from gas processors.
“Net production is well over what it was a year ago,” Fasullo said. “In addition to shale, refiner production also appears stronger.”
In addition to blending normal butane directly into the gasoline pool, normal butane is also consumed through isomerization at refiners and commercial isobutane producers. With isobutane trading at a slight discount to normal butane, both types of consumers have little incentive to produce isobutane.
“There’s likely not as much isomerization occurring due to the spread being negative,” Fasullo said.
Yet the market is on course to right itself. Petrochemical consumers, which typically shun normal butane during the winter months, have been buying recently. Fasullo estimates that petrochemical consumption of normal butane could hit as high as 120,000 b/d during December.
“That’s more like summer-time cracking numbers,” Fasullo said. “Butane is a better feedstock than propane currently because propane is so expensive.”
And exporters will take a big chunk of U.S. butane in the coming month. Traders say several normal butane cargoes have been booked recently as buyers take advantage of a wide price arbitrage to Europe.
Butane landed in the Mediterranean market was $1,130 per metric ton (mt), according to the Dec. 18 OPIS assessment, while North Sea markets were assessed at $1,000/mt. In comparison, U.S. Gulf Coast markets were assessed at $627/mt.
“The chems are getting in on it and the arb to Europe is wide open,” said one Gulf Coast trader.
As such, the oversupply may be a temporary phenomenon. But with major refinery turnarounds scheduled for the first quarter, there may yet be more length in normal butane supplies, according to some traders.