Monitoring inventory levels and domestic, export demand

Propane inventory dynamics are definitely in a state of flux. At this point, traders are still trying to figure out what is the new normal.

At the peak of the shale gas revolution, the amount of propane supply easily overwhelmed domestic demand. Until recently, there wasn’t enough export capacity to deal with the excess. As a result, the propane inventory build was dramatically higher than its historic levels and prices were driven lower.

The winter of 2016-17 was the first time that export capacity was adequate enough to export all of the surplus supply above what was needed domestically. U.S. inventory dropped 64.357 million barrels last winter (see the chart above) as a consequence of that export capacity. U.S. export capacity remains adequate for exporting all of U.S. surplus volumes this winter, should the world demand it.

Fortunately, last year, inventory began at such a high level and prices began at such a low level that U.S. propane markets avoided a major spike in price, though the value of propane was up significantly from recent years. We estimate that in 2016, propane added 17 cents in value directly related to tighter fundamentals (i.e., lower inventory).

Inventory is currently at 67.630 million barrels. If inventory builds at the same rate as last year, from this point forward, it would peak at 81.765 million barrels. Therefore, a draw on inventory comparable to last year would bring it to a dangerously low level. Higher prices would almost certainly kick in to limit both domestic and export demand well before inventory dropped all the way to 17 million barrels.

Since domestic demand was off last year, the expectation is that it will be at least comparable this year. Thus, the bulk of the falloff in demand for propane inventory would most likely come from a decline in export activity. For that to happen, last year’s importers of U.S. propane will need to rely on other sources of supply this coming winter.

This winter should give us a good feel for how much capability importers of U.S. propane have in switching to other sources of supply if economics from the U.S. aren’t to their liking. There will be a price discovery this winter to determine what value U.S. propane prices must be to strike a balance between domestic and export demand. Much uncertainty comes with that price discovery process.

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