TOKYO -- Prices for U.S. liquefied petroleum gas have climbed on the back of surging demand, undercutting an advantage Japan importers had gained in branching out from Middle East suppliers.
The Mont Belvieu spot price, named for a city in Texas, serves as a benchmark for Japanese imports of American LPG, a category that includes propane and butane. The average for the month of July stood at 65 cents a gallon, up about 30% from a year earlier.
U.S.-produced LPG accounted for 36% of all LPG imports to Japan in the fiscal year through March 2017, data from the Japan LP Gas Association shows. As recently as fiscal 2011, the American share was a mere 1%. Meanwhile, the share imported from the Middle East dropped from 87% to 54% during that period.
Wholesalers say the portion of American LPG soared due to a push to diversify sources. But the cheapness of the U.S.-produced fuel also played a major role. Prices of fresh American imports to Japan topped those from the Middle East for only four months in fiscal 2013, when the U.S. share started to climb.
But in the past year through July 2017, U.S. prices exceeded Middle East prices for seven months, indicating that the American product does not enjoy much of a discount anymore.
Mont Belvieu spot prices are entirely dependent on the U.S. internal supply balance. Japan and other Asian countries have stepped up imports of U.S. LPG, which puts a strain on American supplies and drives up procurement costs.
The U.S. is losing its luster as a cheap alternative source for the liquefied gas. Furthermore, this has given Middle East rivals a prime opportunity to make up lost ground.
Saudi Arabian Oil Co., better known as Saudi Aramco, sets contract prices for LPG exports, primarily based on Asian demand. But around 2013, the state-owned energy major began establishing prices with an eye on Asian customers turning to the American substitute.
Now that Mont Belvieu spots have gotten pricier, "conditions are ripe for the Saudis to set contract prices that are cheaper than Mont Belvieu prices," said Masaki Mita, head of the Japan office for Argus Media, a British research firm focused on the energy market.
This year, Japanese LPG wholesalers, including industry leader Astomos Energy -- a partnership of Idemitsu Kosan and Mitsubishi Corp. -- have started basing their pricing schemes in part on Mont Belvieu spots. Up to that point, those companies used only Saudi contract prices as the baseline. But under that arrangement "they were not able to transfer costs of procuring from the U.S.," revealed an insider.
And now severe weather patterns will likely exacerbate the situation. Last month, Hurricane Harvey devastated a vast area of Texas, a state dense with LPG production centers and export terminals. International shipments of the commodity have been suspended across the board due to flooding and other disruptions. As a result, LPG prices have jumped 9% since Harvey's landfall.
The hurricane "exposed the fragile state of the U.S. export infrastructure," said Takayuki Nogami, chief economist at Japan Oil, Gas and Metals National Corp. With U.S. LPG's sway in the Japanese market growing sharply in five years, Japan's wholesalers find themselves grappling as much as ever with price fluctuations and supply shortages -- two risks they had hoped to mitigate.