EIA: Midwest propane market better balanced than year ago

February 5, 2015 By    

Higher inventories, milder weather and falling crude oil and natural gas prices resulted in a Midwest propane market that has not experienced the challenges faced last winter, the U.S. Energy Information Administration (EIA) reports.

Last year, depleted inventories and high winter demand pushed propane prices to record highs and prompted emergency measures to address propane supply shortfalls. This winter, EIA reports that Midwest propane markets are well supplied but that the changes prompted by last winter’s events continue to influence the market.

As of Jan. 30, Petroleum Administration for Defense District (PADD) 2 (Midwest) propane inventories were 11.8 million barrels higher than where they were at the same time last year. They were also 6.3 million barrels higher than the five-year average.

According to EIA, propane inventories in the Midwest began building in the summer and by Oct. 31 were 6.3 million barrels higher than at the same time in 2013. Propane inventories were also 0.7 million barrels higher than the five-year average.

Inventories have remained high since then because of lower demand during a less-severe winter, with Midwest heating degree days from October 2014 to January 2015 being 8.5 percent below the comparable year–ago period.

Price analysis

In addition, EIA reports that higher prices last summer in Conway, Kan., compared with prices at Mont Belvieu, Texas, supported preseason inventory builds. Higher Conway prices kept Midwest propane production in the Midwest rather than being sent to other regions.

The higher inventories, a less severe winter and falling crude oil and natural gas prices caused spot propane prices to fall, EIA adds. Spot prices reflect feedstock costs, processing costs and overall market conditions, including demand and inventory levels.

In 2013, 59.3 percent of propane produced in the United States came from natural gas processing, while 40.7 percent derived from refinery crude oil processing. Because propane is produced from both natural gas and crude oil, the price of propane is related to the prices of both commodities.

Since 2012, propane prices have tracked between crude oil and natural gas prices on an energy-equivalent basis. Recent falling crude oil prices have significantly narrowed the spread between crude oil and natural gas, and have pushed propane prices lower.

Spot propane prices at Conway and Mont Belvieu averaged 97 cents per gallon and 94 cents per gallon, respectively, in October 2014 – 14 cents per gallon and 20 cents per gallon less than at the same time in 2013, according to EIA. As crude oil prices began to fall and propane inventories continued to build in both PADD 2 and PADD 3 (Gulf Coast), spot propane prices at both hubs fell.

By December, Conway and Mont Belvieu propane spot prices averaged 53 cents per gallon and 56 cents per gallon, respectively. For the week ending Jan. 30, prices at Conway averaged 45 cents per gallon – $2.06-per-gallon lower than the same week last year, when supply shortages were most acute.

Although Midwest propane inventories are still quite high, EIA says last winter’s propane supply shortages, as well as changes in infrastructure and supply patterns, continue to affect Midwest wholesale and retail propane markets. Before January 2014, the spread between Midwest retail and wholesale prices averaged 65 cents per gallon, reflecting traditional propane supply and distribution patterns from supply sources to the wholesaler and then to the propane retailer. But as propane markets tightened last winter this spread rapidly increased as costs for moving supplies through the supply chain increased. Although propane markets this winter are not experiencing problems, the retail-wholesale price spread has not returned to historical levels.

In addition, EIA reports that propane wholesalers and retailers made changes to secure supplies well in advance of winter and increased the amount of propane they hold in inventory. Wholesalers and retailers who opted to purchase propane well in advance of this winter likely did so when prices were about 50-cents-per-gallon higher than current prices.

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