In the Know is a monthly partnership between LP Gas magazine and Propane Resources. Our focus this month is on supply and demand, addressed by managing partner Marty Lerum.
Q: What has the 2016-17 winter heating season taught us about propane supply and demand dynamics?
A: Last winter taught us something we already knew: The market understands the changes made in the propane distribution system to move new natural gas liquid production to new export and petrochemical facilities. Fractionators and pipelines have been built; pipelines have been rerouted; pipelines are now carrying different products; export facilities have been built for propane; and butane, ethane and petrochemical facilities have been expanded to use more ethane and propane.
Not many years ago, Dow Chemical’s CEO announced its joint venture petrochemical plant in the Middle East and proclaimed there will never be another petrochemical plant built in the United States. Yet today, the U.S. is the world’s largest producer of propane and ethane. Propane tank car facilities have been built and expanded across the U.S. to replace propane pipeline capacity that has disappeared and to take advantage of netbacks to producers that are above export prices.
The market doesn’t understand yet how this “new propane distribution system” will react to regional demand surges and how high prices need to go in order to balance that demand. Last winter the market got an understanding of the new normal inventory levels needed in Mont Belvieu, Texas, to handle increased propane export demands. The market found out how the new export traders can affect U.S. prices when world propane prices and export capacity line up in tandem. The graph above shows how propane prices moved up 40 cents per gallon due to export demands at a time when retail propane demands were anemic. That really was quite amazing, as the market didn’t believe it could happen.
The market doesn’t know how quickly the Midwest and Conway area can rebalance with higher-than-expected demands. We have seen no early winters or heavy crop drying demand since the U.S. propane distribution system has been retooled for exporting. When heavy demand does hit the Midwest, the market will err on the conservative side. Because we are dealing with an unknown, companies that have propane inventory will want to hold onto those volumes until they see they don’t need it or the price is high enough they will sell it and take the profit. Those that don’t have the inventory will need to bid up propane prices in order to get it.
We learned this winter that higher propane exports could pull up propane prices by 40 cents per gallon. Don’t be surprised to see the same thing happen in the Midwest and Conway market the first time demand begins to outstrip supply.
Marty Lerum is managing partner of Propane Resources. He can be reached at email@example.com or by calling 913-262-8531.