SPOT earnings of very large gas carriers transporting liquefied petroleum gas have risen to their highest levels since October following a relatively stable period during the past few weeks.

The Baltic Exchange’s BLPG index, an average of assessed time charter equivalent earnings on the three main VLGC trade routes divided by 10, crossed the 5,000 mark when markets closed on Tuesday. That constituted a gain of more than 24% since Friday and 22% since the week started.

An important driver of VLGC demand is that propane prices in the US are lower compared with Asia. Another factor influencing demand for freight is the price of propane relative to naphtha. Both are used as petrochemical feedstock, but naphtha is carried on product tankers.

According to Jefferies shipping analyst Omar Nokta, favourable propane pricing dynamics have been driving this week’s surge in VLGC rates.

“Widening US export pricing arbitrage and favourable propane pricing relative to naphtha [are]leading to higher spot activity,” he said in a note on Wednesday.

Another key factor influencing VLGC rates is the Panama Canal. When the unprecedented drought in 2023 led to restrictions and delays, VLGC tonne-miles increased, and rates surged. When conditions began to normalise in the spring of this year and VLGCs returned to the Panama Canal, tonne-miles decreased and VLGC freight rates suffered.

“Currently, the US Gulf-Asia propane price differential stands at $210 per tonne, up from $195 per tonne last week, though is below the $225 per tonne average thus far this year,” said Nokta.

“We note that the USG-Asia freight rate of $105 per tonne equates to 50% of the propane price differential; this is lower than the long-run 65%-70% seen since 2015 but is higher than the lows of 25%-35% seen during the soft August-October months.”

Another factor that has weighed on VLGCs over the summer was adverse weather conditions in the US Gulf, which led to terminal downtimes and limited cargo availability.

However, the normalisation of the Panama Canal was the key factor dragging on VLGC rates and their inability to capture the traditional share of the US-Asia arbitrage in the summer, Dorian LPG chief executive John Hadjipateras told investors during the company’s 3Q24 earnings call.

“Factors like the efficiency of the transits feature more prominently than the export capacity restrictions,” he said.

“With an arbitrage as open as it is, the reason we have not been able to capture more [of it] has more to do with the absence of any kind of inefficiencies in fleet utilisation, which is a feature of what we saw last year to a great extent due to the [limits on] Panama Canal transits.”