The disappearance of geopolitical premium and the lack of demand follow-up form a resonance, making it difficult to change the short-term weakness of LPG futures prices. However, the recovery of short-term transport capacity and the progress of the US-Iran agreement may bring about a period of disturbance.

Recently, the futures price of liquefied petroleum gas (LPG) has fallen sharply driven by the easing of the geopolitical situation in the Middle East. As of the close on June 16th, the price of the main LPG futures contract has fallen by nearly 10% over three trading days. The market's previously accumulated risk premium is being rapidly squeezed out.

Hai Zheng, a futures researcher at the Energy Research Institute of the Shanghai Stock Exchange, told reporters that according to the 14-point draft of the US-Iran understanding memorialized by the Iranian media, the United States has promised to fully lift the maritime blockade of Iran within 30 days, to suspend sanctions on the sale of Iranian oil, petrochemical products and their derivatives, and to allow Iran to fully use its financial resources. In return, Iran will reopen the Strait of Hormuz within 30 days and reiterate its commitment not to develop nuclear weapons within the framework of the Non-Proliferation of Nuclear Weapons Treaty.

"Geopolitical risk premiums have thus fallen sharply," said Zheng Mengqi. Crude oil prices promptly fell, and the Hormuz Strait is expected to resume shipping, directly feeding into the market's expectations of increased LPG supplies from the Middle East, exerting a dual pressure on LPG prices from both the cost and supply sides.

Hengli Futures LPG researcher Guo Jinwen also holds a similar view. She believes that the main driver of the current market decline is the easing of geopolitical tensions. The risk premium accumulated in the early stage was quickly reversed, leading to a synchronous decline in overseas propane prices, and the LPG futures price followed the weak trend.

Despite the geopolitical tensions weighing on the market, fundamentals have not weakened in tandem, providing potential bottom support for prices.

Zheng Mengqi analyzed and believed that from the supply side, the supply from domestic refineries is still at a low level. The three major refining centers in East China, namely Yangzi Petrochemical, CNOOC Taizhou, and Zhongjin Petrochemical, are all in the maintenance stage, and the daily commodity volume in East China is only 3300 tons at present. As of the week ending June 11, the national liquefied gas commodity volume was 480,500 tons, a mere 0.82% increase from the previous month. Although the import volume of liquefied gas has increased slightly compared to the previous period and has been maintained at 161,000 tons for three consecutive weeks, the high price of imported gas has provided a certain cost support for the domestic market.

"The demand side shows seasonal weakness," said Zheng Mengqi, adding that with the rise in temperatures, the burning demand has entered the off-season; on the chemical demand side, the high price of LPG has suppressed the downstream purchasing willingness. As of the week ending June 11, the utilization rate of the MTBE export factory sample in Shandong was 41.88%, and the utilization rate of the alkylate oil sample was 24.73%, both far below the levels of the same period last year. Although the PDH unit startup rate has recovered somewhat, it is still at a historical low. In terms of inventory, the port sample inventory was 2.1114 million tons, an increase of 2.76% compared to the previous month, although the absolute level is low, it has shown a slight accumulation trend.

Compared to short-term support factors, the market's expectations for the long-term supply and demand landscape are more pessimistic.

Guo Jinwen believes that although the US and Iran have reached a preliminary agreement on the navigation of the Strait of Hormuz, the complete removal of mines in the waters will still take several months, and the actual transport capacity is difficult to recover to the pre-conflict level in the short term. The phased supply increase may not meet expectations, which may slow down the rate of price decline in the short term.

However, looking at the longer-term picture, global LPG supply is still ample overall. Guo Jinwen believes that despite the continuous increase in exports to Japan, South Korea, India and other regions, domestic stocks are still accelerating. At present, US propane production has stabilized at a high level of about 30 million barrels per day, constrained by the export capacity of the terminal, and the ultra-high production is difficult to digest fully, with stocks 28% higher than the same period last year. In the Middle East, the pipeline at Saudi Aramco's Juaymah terminal in the Eastern Province is expected to be repaired by July, and future Middle East exports are expected to recover, which will further consolidate the pattern of loose supply.

"The demand side is even weaker," Guo Jinwen said, adding that global LPG consumption declines seasonally after entering the summer, and the market mainly relies on chemical demand for support. Benefiting from the recovery of PDH profits and the increase in propane arrivals in May and June, the PDH operating rate has gradually risen from the previous 48% to 64%, and chemical demand has improved month-on-month. However, as the geopolitical situation eases and oil prices fall, downstream players are more cautious, and the market price of PP has also softened. If PDH profits narrow later, price support from the chemical sector will also weaken.

Zheng Mengqi believes that in the short term, the pattern of low supply and low inventory will provide some support for the futures price of LPG.

Guo Jinwen said the disappearance of geopolitical premium and the lack of demand follow-up form a resonance, making it difficult to change the short-term weakness of LPG futures prices. However, the recovery of short-term transport capacity and the progress of the US-Iran agreement may bring about a temporary disturbance. We should closely monitor the progress of the signing of the US-Iran memorandum of understanding, the actual resumption of shipping in the Strait of Hormuz, and the 60-day nuclear issue negotiations.

SunSirs has been continuously tracking price data for over 200 commodities for nearly 20 years, please contact support@sunsirs.com for subscription.