For the week ending June 2, the U.S. Energy Information Administration reported a 3.293-million-barrel build in U.S. propane inventory, which helped maintain a bearish bias on propane prices. The build was only slightly less than the 3.446-million-barrel build for the week ending May 26 that had shocked propane markets one week earlier.
Propane inventory has increased 10.774 million barrels since its first build for this year, which occurred during the week ending April 21. All but 4.035 million barrels of that build have occurred in the past two weeks.
The primary reason for the inventory builds has been a massive drop in propane exports, especially over the last two weeks. Propane exports were at 1.254 million barrels for the week ending May 12, but they’ve averaged just 608,000 barrels per day (bpd) over the last two weeks.
The drop-off in exports has gotten all of the headlines and attention in the propane world, as it should. However, there is at least one other key contributor to the gains in inventory on the domestic side. Petrochemical companies have also been decreasing their consumption of propane as its relative value to crude has increased.
After a major jump in consumption during March, petrochemical companies cut back on propane use during April and May. Throughput was 379,000 bpd in March and 326,000 bpd in May.
Propane’s average price in March was 61.85 cents, the lowest of the year. The price in April was 65.35 cents, and the price in May was 64 cents. Ethane prices have increased more than propane since March. Mont Belvieu purity ethane was at 22.6313 cents in March. It then jumped nearly 8.5 percent to 24.548 cents in April, and it jumped nearly 4 percent to 25.4688 cents in May. Propane is up less than 3.5 percent over the two months, yet ethane consumption is up.
In March, propane was 21.21 percent of the total feedstock stream, with ethane at 64.4 percent. In May, propane had dropped to 17.99 percent and ethane increased to 67.1 percent.
Even with the decline, petrochemical consumption of propane in May 2017 was up considerably over May 2016. May 2016 propane consumption was at 285,000 bpd. May 2015 and May 2014 were at 358,000 bpd and 252,000 bpd, respectively.
Typically, there are gains in propane consumption for a couple of months after May, but it could be different this year with propane at a relative high percentage of crude. In June 2016, Mont Belvieu propane was valued at 43.3 percent of West Texas Intermediate (WTI) crude and ethane was at 19.5 percent. Currently, Mont Belvieu propane is at 54 percent and ethane is at just 20 percent.
Indeed, early reports for June show petrochemical consumption is continuing to fall. Petrochemical companies are extremely price sensitive and can adjust their processes quickly to consume the most cost-effective feedstock. The 10.7-percentage-point gain in propane’s relative value to WTI crude over the last 12 months compared to just a 0.5 percent gain in ethane suggests why ethane is gaining favor over propane as a feedstock.
There are many factors working to cause propane inventory to build rapidly, and the 600,000 bpd drop in exports should garner the most attention. However, a drop in petrochemical consumption of 53,000 bpd is also a significant contributor. It has long been known that petrochemical companies are very price sensitive. We are now learning that propane exports can respond rapidly to price as well.
However, there is a significant difference between the two. Petrochemical companies can continue to favor one feedstock over the other through all seasons of the year. The primary driver for them is the price of the feedstock.
However, much of the export demand is for heating. For now, importers of U.S. propane have the luxury of canceling or delaying cargoes, making it appear that all export volumes can be as elastic as domestic petrochemical demand. Since so much of the export volume is for heating, there will come a time when there will be no substitute for propane. Buyers won’t be able to shrug off propane cargoes because some other “feedstock” is a better value.
In fact, U.S. petrochemical company consumption of total feedstocks in April and May averaged 1.815 million bpd, the highest since December 2007. Petrochemical companies can run their businesses unimpeded by switching between the most cost-effective feedstocks.
Many buyers of U.S. propane exports that are fulfilling heating demand don’t have the flexibility of the petrochemical companies. They have one product stream: propane. At some point, there won’t be any choice, except to buy propane to meet demand. It is the same choice that U.S. propane retailers and consumers will face.
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