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ANALYSIS: Butane’s strength defies fundamentals due to to short-covering, positions

HOUSTON, February 17, 2016 (PCW) -- Butane has shown uncommon strength since the end of January, a phenomenon that lingered through early this week.

During that time frame, WTI crude fell $4.18/bbl, or about 12%, while butane actually rose from 53.625 cpg on Jan 29 to 60.75 cpg Monday, a nearly 13% increase. Since Monday, however, butane has tumbled down to 51 cpg Thursday, but rallied Friday to 53 cpg on the back of crude’s surge. In more comparative terms, the butane-WTI ratio peaked at 0.86 Monday (see graph below) when butane was 60.75 cpg and WTI settled at $29.69/bbl (or a 70.7 cpg equivalent).

This strength is not easily explained by butane’s fundamentals, which are middling. While exports have risen since the beginning of the year due to increased terminal capacity along the Houston Ship Channel, several sources said it has fallen below their forecasts. What bullish support stronger exports could have provided, meanwhile, has been offset by falling cracking demand, due to butane losing its cash cost competitive advantage and lower Gulf Coast refinery run rates.

Instead, market chatter regarding butane’s recent strength has revolved around players who were short covering, which is typical around the end of the month, as well as 1Q positions taken in expectation of rising exports. – Samantha Hartke

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