New study analyzes changes in propane market dynamics since 2013-14 crisis

November 3, 2015 By    

The U.S. propane industry is in a much better position to handle a “perfect storm” of extreme demand events than it was during the winter of 2013-14, a new study from RBN Energy for the Propane Education & Research Council (PERC) suggests.
Two years ago, high crop drying volumes, propane exports and severe cold weather combined during the heating season to reduce propane inventories significantly. That demand created regional distribution challenges, and it contributed to soaring retail and wholesale price spikes.

The propane industry dynamics from 2013-14 were the basis for PERC’s decision to contract with RBN Energy earlier this year. Through the partnership, PERC and RBN Energy sought to assess the market’s response since that crisis and gauge the prospects for future propane supply disruptions.

“In essence, the news for the propane sector is good,” study authors Rusty Braziel and Ron Gist write. “Increased propane production close to primary demand areas, as well as a propane transportation network that is more interconnected and flexible, allows adjoining regions to help solve problems nearby.”

The study still urges propane retailers to prepare for short-term market events that can disrupt the supply chain.

Propane production growth sourced from the nation’s shale plays, most of which is coming from natural gas processing plants, is helping to reshape the market. In fact, the United States produces almost twice as much propane as it consumes, the study notes. Much of that supply growth is coming from the Northeast and Midwest – regions that combine to total about 80 percent of all U.S. consumer propane demand.

The location of that production – closer to demand centers – helps to improve supply reliability, RBN Energy reports in the study. In addition, investments in transportation infrastructure, including pipeline and rail, will help the industry move propane to market.

With the growth in production has come a significant increase in U.S. propane export volumes. By mid-2015, the country was sending about 700,000 barrels per day (bpd) of LP gas to export markets – eight years after it was importing an average of 160,000 bpd, the study notes.

RBN Energy notes numerous challenges that accompany the growth in propane production. These include global markets’ growing influence on U.S. propane prices, more complex inter-regional supply dynamics and a more diverse supply chain.

As part of its analysis, RBN Energy developed a supply/demand model of the monthly U.S. propane market at the PADD level. It goes back to 2005 and forecasts 120 months forward – to 2025. The analysis accounts for two supply scenarios (growth and contraction) and two demand cases (normal weather and severe weather).

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