Propane’s relative value and the buying environment

June 13, 2016 By and    

Propane retailers and their customers may have been feeling the heat of higher propane prices recently. The price of Mont Belvieu propane increased from a year low of 30.125 cents on Jan. 19 to a high of 56.125 cents on May 17. It was an 86.3 percent increase in less than five months.

Conway propane saw an even more dramatic 97.2 percent increase from a year low of 27 cents on Jan. 15 to its 2016 high of 53.25 cents on May 16.

High demand for exports pushed propane prices higher through mid-May, but since then a slowdown in export demand has allowed propane prices to drift down from their year highs by about 5 cents per gallon.

The good news is that even with the rally over the last few months, propane prices are still low from a historic perspective. Propane also remains at a very good relative value.

160610-prop-relative-value-chrt-460

The chart above plots the value of Mont Belvieu propane against West Texas Intermediate (WTI) crude on a simple percentage basis. Propane’s relative value spiked in early May due to the export demand. Propane was trading at 50 percent of WTI crude, meaning a barrel of propane was half the price of a barrel of crude. That was above the five-year average of 45 percent for mid-May.

With the retreat in prices over the past three weeks, Mont Belvieu propane is now pricing at around 42 percent of WTI crude, which is right on the five-year average for this point of the year. That simply makes propane a better value in the energy marketplace.

For example, when Mont Belvieu propane hit its year high on May 17, heating oil was trading at $1.4674 per gallon. That was the equivalent of 97 cents per gallon for propane. Today, heating oil is trading at 1.5365 cents, or the equivalent of 101-cent propane. Gasoline is trading at 1.6015 cents per gallon or the equivalent of 117-cent propane. This all means that propane retailers and consumers are still getting a very good value, even though prices have nearly doubled since the first of the year.

As propane buyers, we still have those year lows in our mind, making the current price seem high. Our tendency is to wish for the opportunity to have another crack at the 30-cent propane that was available in January. It is very unlikely, with all the new export capacity, that prices will come close to that level again.

However, if we look at propane prices from a historic and relative value prospect, it still looks like a positive buying environment for propane retailers and consumers. With the pullback in propane prices since the middle of May, there is actually a much more favorable buying environment than many are perceiving. It is just difficult to get those year lows out of our minds.

 

For more Cost Management Solutions analysis of the energy market that helps propane retailers manage their supply sources and make informed purchasing decisions, visit www.lpgasmagazine.com/propane-price-insider/archives/.

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