Pricing of Liqueed Petroleum Gas in North-West Europe

Abstract: Liquefied Petroleum Gas (LPG) is a flammable mixture of hydrocarbon gases, mainly propane and butane, used for various heating purposes and as vehicle fuel. This thesis focuses on examining the LPG market, evaluating a couple of driving factor hypotheses for the propane price and developing a model for forecasting of future propane prices in North-West Europe, both on daily and monthly horizons. It is shown that especially two factors, crude oil (brent) and naphtha, which is a light crude oil distillate produced when refining crude oil, have strong relation to propane and may affect the propane price. Unfortunately, no good model to forecast the daily propane price was developed. For the monthly average price, the proposed models perform badly when forecasting the actual price, but one of the models, an AR(12)model, which can forecast the direction of propane price movements one and two months forward in time is presented. The AR(12) model is able to forecast the correct price movement direction with an accuracy of over 70%. This result is good, and shows that the AR(12) model is a useful tool in the LPG trading.