The first half of 2026 saw the LPG market primarily driven by geopolitical events. The narrative unfolded from escalating tensions to outright conflict, intensification of war, and finally a return to calm, with LPG prices closely mirroring crude oil trends. The temporary disappearance of Middle Eastern supply, which accounts for roughly 40% of global LPG output, caused worldwide prices to fluctuate in unison. Notably, the global LPG supply chain demonstrated greater resilience than initially anticipated. Following the confirmation of a Memorandum of Understanding between the US and Iran, the conflict entered a lull, with LPG prices largely reverting to pre-war levels.
With Middle Eastern supplies disrupted, US exports surged significantly. Previously completed port infrastructure was swiftly utilized, leading to a marginal drawdown in US LPG inventories. As the world's largest LPG exporter, the US redirected its logistics flows towards China and established new shipping routes to South and Southeast Asia, becoming a primary supply source for these regions.
Chinese refinery operating rates fell sharply, reducing domestic refinery gas supply. However, overall domestic LPG market conditions remained relatively stable, cushioned by shrinking combustion demand and adjustments in highly flexible chemical feedstock demand. Regional market dynamics diverged. In Shandong, a significant shift from industrial to residential use occurred, keeping residential gas prices subdued and opening an export window to East China. Downstream chemical sectors experienced high volatility. PDH margins swung from deep losses at the war's onset to record highs for the period, while blending feedstock profits surged briefly before plunging into deep losses and closing export windows, causing substantial fluctuations in downstream chemical plant operating rates.
Key Market Dynamics for the Second Half
Geopolitics will remain the primary driver in the second half. If shipping routes remain open, the market will likely price in supply recovery and potential short-term arrival surges, suggesting a bearish bias. Conversely, after a deep price correction, absolute price levels are already low. Any geopolitical resurgence could lead to wide price swings as the market searches for a bottom.
Review of First-Half Performance
Every move in the LPG market during H1 2026 was influenced by the US-Iran conflict. As the situation appears to settle, it's crucial to examine how LPG found a new equilibrium during this unprecedented event. From a practical standpoint, the supply disruption was historic, given the Middle East's ~40% share of global supply. From a market perspective, the price action closely resembled the previous year's 12-day Iran-Israel conflict: volatility spiked briefly, then declined slowly as prices consolidated at high levels, finally returning to low volatility as the conflict froze. This raises the question: was the market so efficient that it fully priced in future events at the outset, or did inventory buffers and real-world adjustment capabilities far exceed analyst expectations? Likely a combination of both. What is certain is the remarkable robustness of the energy system before it faces irreversible, catastrophic damage.
System Resilience: The Case of India
India serves as an excellent example of this systemic robustness. Driven by rapid economic growth and government subsidies for LPG, both consumption and imports had been hitting record highs, a trend continuing right up to the conflict's outbreak. When Middle Eastern supply—accounting for 90% of India's imports—suddenly halted, prices soared. The Indian market sought a new balance. A decline in consumption was natural, as most demand is price-sensitive residential use. The surprise was a significant ~300,000-ton (roughly 30%) increase in domestic LPG production. This is astonishing as India's output is refinery by-product gas, while refinery run rates remained largely unchanged. The flexibility of Indian refineries proved far greater than anticipated.
India's import structure also adjusted rapidly. From March onwards, US cargoes became dominant. The US share of India's total imports skyrocketed from 12% in February to 56% by May. While imports still suffered, the impact was less severe than pre-war forecasts. This logistical shift had precursors in last year's trade wars, which altered global LPG flows and opened a US-to-India import window. Indian traders likely didn't anticipate that last year's arrow would hit the bullseye with even greater force this year.
China's Adjustment: Larger Buffer, Milder Impact
Compared to India, China's LPG import changes were more moderate. Two key reasons: First, China's LPG consumption is now dominated by chemical feedstock demand, which typically maintains larger inventories and offers more flexible plant operation, providing a larger buffer and less acute pain. Second, China's import sources are more diversified, mitigating the impact of traditional Middle Eastern supply cuts.
Domestic production changes were also milder. Soaring crude prices and domestic measures to ensure refined product supply severely compressed refinery margins. This led independent and state-owned refinery run rates to hit historic lows for the period. Consequently, commercial liquefied gas output as a by-product also reached a record low, indirectly confirming the gradual decline in China's residential combustion demand and the elasticity of chemical feedstock use. From this perspective, China's energy system buffer indeed far exceeds India's.
US LPG Exports: New Infrastructure Breaks Bottlenecks
With one of the world's two major LPG export hubs (the Middle East) effectively shut down, the US naturally shouldered the burden of increased exports. New export facilities completed last year provided crucial support. Terminals like Targa, Energy Transfer's Marcus Hook, and the new Enterprise Neches River facility propelled US LPG exports to consecutive record highs, drawing more VLGC shipping capacity to US shores.
US Production and Inventory Trends
US net LPG production continued to rise in 2026. However, rapid export growth led to a marginal drawdown of the inventory accumulated early in the year, slowing the stockpiling rate. From an annual perspective, as US oil and gas production gradually peaks, NGL production peaks later than crude due to an increasing gas-to-liquids ratio. While US NGL output is still rising, resource depletion in major basins and conservative capital expenditure by producers suggest a peak in US NGL production is possible in the foreseeable future. At that point, the export bottleneck would shift from infrastructure capacity to production itself. With the outlook for new Middle Eastern capacity clouded by the war, a comprehensive discussion on overall LPG supply-demand and prospects will follow once the geopolitical dust settles.
Record-High Freight Rates
LPG freight rates hit historic highs in H1 due to multiple factors: the primary driver was geopolitical tension, which naturally spurred shipowners to push rates higher, creating a self-reinforcing cycle; the blockade of the Strait of Hormuz immobilized part of the VLGC fleet; new routes from the US to South/Southeast Asia are longer, tying up vessel capacity for extended periods; and rising fuel costs increased VLGC operating expenses. These combined factors kept freight rates elevated, with Middle East route prices becoming somewhat distorted. While US Gulf rates have since retreated, freight rates are expected to remain high in H2.
El Niño Poses Risk to Panama Canal
A strong El Niño is forecast for 2026-2027, recalling its severe impact on the Panama Canal in 2023: water level drops, vessel congestion, and soaring costs for Cape of Good Hope detours. The canal authority appears to be preparing. In early June, it announced a reduction in the maximum draft for Neopanamax locks from 50 to 49.5 feet. With VLGC capacity already tight in mid-2026, if El Niño triggers Panama Canal issues, the impact on both shipping capacity and rates could be significant. This logistical risk cannot be ignored.
The Future of Iranian Tensions
The future direction of the Iran situation and the Strait of Hormuz's navigation status remains uncertain. However, if seeking certainty within uncertainty, one can assert that the Strait of Hormuz will never be the same as before. A permanent geopolitical risk premium is now embedded in prices. The likelihood of escalation in the Middle East powder keg is also higher than it was three or even one year ago.
Residential Gas Market Trends
Residential gas prices in H1 largely followed the geopolitical pattern, rallying then retreating. Notably, significant regional price disparities emerged. In Shandong, prices fell to multi-year lows, diverging sharply from East and South China. This was due to numerous local chemical plants. With chemical feedstock margins deeply negative recently, demand shifted from industrial to residential use within the region. To reduce losses, producers cut output of unprofitable industrial gas, increasing supply of relatively higher-priced residential gas. This increased supply then pressured residential prices in Shandong, even opening an export price spread to East China earlier on. The situation may ease with upcoming refinery maintenance in Shandong. Conversely, East China saw firmer residential prices due to reduced commercial supply from regional refinery maintenance. Thus, while the overall trend was similar, significant micro-level regional price differences emerged, promoting inter-regional cargo flows.
Industrial vs. Residential Price Inversion
As mentioned, the 2026 inversion between industrial and residential gas prices was severe. While past inversions fluctuated around zero, this year's early inversion一度 exceeded 1000 yuan, making industrial gas extremely weak while residential prices found some support due to dispersed downstream demand. This severe inversion strongly incentivized producers to shift from industrial to residential output. As this market behavior deepened, the inversion has recently shown signs of easing.
Global Rebalancing
Due to shipping lead times, the transmission of the supply shock was lagged. For Chinese imports, volumes hit a trough in April, a month after the conflict began, but rebounded in May and are expected to stabilize in June. In terms of supply structure, US cargoes regained dominance from May, reversing the import weakness seen since last year's trade wars. This demonstrates that global logistics have become significantly more flexible in the face of instability.
Volatile Downstream Chemical Operations
Operations in downstream chemical plants were highly volatile. Taking PDH units as an example, margins plunged to around -4000 yuan/ton at the war's start, making operations unprofitable. Producers relied on inventory drawdowns for cash flow. However, as the war premium faded, PDH margins recovered from absolute lows to period highs, with capacity utilization rates climbing steadily. Blending feedstock producers experienced the opposite: a brief profit spike at the war's outset, followed by a steady decline. MTBE units initially maintained high run rates by exporting surplus capacity, but as international MTBE prices fell with oil, the export arbitrage window closed, leaving domestic supply with no outlet and causing utilization to plummet. With the refined products market weak, alkylate production margins were also dismal, pushing capacity utilization to new historical lows.
Stable Inventories Amidst War
Despite the conflict, domestic LPG inventory levels remained stable, providing limited price direction.
Sharp Swings in Chinese PDH Maintenance
Chinese PDH unit maintenance schedules have been volatile, with capacity utilization currently rebounding above 75%. A comparison of PP production margins across different routes shows that since the PDH investment boom of recent years, PDH margins have consistently been the lowest among PP processes, making it the marginal supply that maintains dynamic balance. This became more pronounced after the war, with PDH margins and utilization rates swinging wildly. PP prices generally float around oil-based production costs, but PDH unit adjustments help maintain dynamic supply-demand balance. With rising PP exports, Chinese PDH units could even help set the global PP price equilibrium.
Decline in Warehouse Receipts and Deliveries
Amidst high price volatility, LPG warehouse receipts and delivery volumes have decreased significantly compared to previous years. This further weakens price anchoring for LPG futures, which already struggle with basis convergence. For instance, in March, the futures market priced residential gas until March 18th. From March 19th, a valuation shift occurred, with domestic prices rallying rapidly to close the domestic-international spread, bringing it back to a normal range. With poor basis convergence, the market constantly faces a choice: converge towards international prices or residential gas prices. This leads to relatively disorderly futures price movements, a situation expected to persist.
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