OPEC+ move to extend oil cuts to stir 1.6 mil mt/year LPG output loss

The coalition of OPEC and other oil producers' early April decision to extend production cuts of about 1.16 million b/d is projected to trigger a 1.6 million mt/year loss in LPG output, or a monthly drop of about three Very Large Gas Carrier cargoes, should the reduction be fully achieved, S&P Global Commodity Insights analysts said in a report.

This represented a decline of around 8% from the 452 VLGC liftings recorded in 2022 from Saudi Arabia, the UAE and Kuwait, according to the S&P Global report.

The three major Middle Eastern producers together exported some 24 million mt of LPG -- largely evenly split between propane and butane -- last year via 675 vessel liftings. Around 84% of the total exports were lifted by VLGCs, each cargo of about 44,000 mt in size, while the remainder was lifted by smaller and mid-sized vessels.

OPEC+ oil production over May-December was forecast to fall by about 1 million b/d, with the largest decline from Saudi Arabia, the UAE, Iraq and Kuwait. The actual supply cut would be less, as almost all these countries are already producing below quota levels.

These will be in addition to the cuts decided at the 33rd OPEC and non-OPEC Ministerial Meeting, when the coalition decided to lower the oil production quota by 2 million b/d from November 2022 to December 2023.

LPG, a by-product of upstream production, is susceptible to crude oil production from the Middle East. Associated gas-based LPG accounts for more than 75% of total LPG output in Saudi Arabia, the UAE and Kuwait.

An oil production increase, or decrease, of 1 million b/d will lead to a 2.1 million mt/year change in LPG output in Saudi Arabia; a 2 million mt/year change in the UAE, and a 1.8 million mt/year change in Kuwait, S&P Global analysts said, adding that the voluntary production cuts could lead to a 1.6 million mt/year LPG production loss.

Some market sources contacted by S&P Global concurred with these estimates, expecting imports to dip by about two to three VLGC-sized cargoes per month should the cut be fully implemented. This is based on calculations of how much producers are producing and how much are exported.

As most OPEC+ members are producing below their quota limits, the real decline may be lesser than what has been announced, the sources said.

They added that since a major share of Saudi and UAE production comes from gas processing plants, there would be relatively less impact on LPG output when they announce crude cuts.

S&P Global analysts said both associated gas from crude production and non-associated gas from gas production, go to gas processing plants. In the case of Saudi Arabia and the UAE, nearly 87% and 52% of LPG production, respectively, are from associated gas that comes with crude production, which impacts the region's LPG production.

In contrast, 97% of LPG produced from non-alliance member Qatar comes from non-associated gas production, S&P Global analysts said.

Stiff competition

Trade sources said any decline in production from Middle Eastern OPEC+ members could most likely be offset by supply from the US, Qatar and Iran, which has been increasing its monthly exports to above 600,000 mt lately.

"Also Asian buyers will be happy to buy US cargoes on Mont Belvieu basis and sell on (Saudi) CP-linked pricing," one market source said, underscoring the stiff competition Middle East producers face, as global production is seeing rising supply from North and West Africa, Australia, the US Gulf, East and West coasts, Canada, North Sea and Russia.

"We should also bear in mind that Qatar and Iran are not members of OPEC and their volumes will continue to be seen in Asia, especially China as per Iran cargoes," the source added.

Looking at LPG export growth out of the Middle East in 2022, S&P Global analysts expected a flat or slight decline in LPG exports this year, so Asia's incremental demand will most likely be met by US supply, which would boost the ton-miles for shipping.

Another trade source has a different estimate. According to his calculations of Middle Eastern LPG exports versus crude production, volumes would be reduced by about 1.5 VLGC load.

He added that the market is not reacting immediately to the cut, though another source said, "any real impact, if any, will be felt from June onwards".

According to S&P Global calculations, Saudi Arabia, the UAE, and Kuwait were likely to cut oil production by 391,000 b/d, 150,000 b/d and 128,000 b/d, respectively, totaling 669,000 b/d.

While the likely impact on the region's LPG production would be around 1.35 million mt/year, it would be for eight months starting May. It is likely to impact 901,000 mt/year of LPG production. So the actual impact would be about 1.7 VLGC load per month spread across a year.

The analysts said the 1.16 million b/d of oil production cut is in addition to the 2 million b/d starting November 2022 to December 2023, leading to a total OPEC+ cut of 3.16 million b/d.

Any impact on crude production will likely impact global LPG prices as well. The latest OPEC+ announcement prompted analysts to raise crude price forecasts for 2023, with S&P Global analysts forecasting Dated Brent to average $87/b in 2023, from $83/b previously.

"Hence that's why crude/LPG has had a bit of a run," one source said, adding "it certainly impacts crude more than it impacts LPG".