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DIGITAL EDITION
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THIS WEEK'S TOPIC:
PROPANE'S VALUE
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A look at propane’s current value relative to WTI crude
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We have discussed propane’s value relative to West Texas Intermediate (WTI) crude in Trader’s Corner on numerous occasions. It is an important metric because it gives propane retailers a way to evaluate the value of relative crude against a related benchmark. The comparison provides needed guidance when managing the price risks associated with propane supply.
Propane’s relative value to crude is in an important transition, providing us another reason to pay particular attention to how it is moving. For that reason, we created a chart (below) that we think will help put propane’s current value relative to WTI crude in its proper perspective.
There is a feeling in the propane industry that propane prices are becoming strongly overvalued. Much of that feeling is based on the recent history concerning propane’s relative value to crude. Over the last five years, Mont Belvieu propane has averaged 48 percent of WTI on a daily basis.
Prior to 2011, the average daily relationship was 70 percent. The relative value was driven down in 2011 through 2016 as U.S. production overwhelmed domestic demand and export capacity was not yet adequate to deal with the excess supply. As a result, inventories built, driving prices lower.
But, now that domestic demand and export capacity exceed U.S. supply, there is no longer a bottleneck in the supply chain. The result is that propane is returning closer to its historic relative value to crude of 70 percent, which was the daily average between 1999 and 2010.
(continued below)
Recent Mont Belvieu propane reached 79 percent of WTI crude propane, which felt a little pricey. At the end of the month, prices had pulled back to about 75 percent Mont Belvieu to WTI crude.
A relative high valuation to crude isn't surprising given the uncertainty going into this winter. The market is still aware that 64 million barrels of inventory was drawn down last year, which seems foreboding with inventory likely to start winter at around 80 million barrels this year.
So, yes, propane may be overvalued to crude right now, but probably by around five percentage points. The more common perception of retailers is that it is overvalued by 35 percent, based on recent history.
If retailers are looking at the downward price correction that was underway at the end of September, expecting a major pullback in propane prices, they could be disappointed. Focusing on the fundamentals would suggest this pullback is more likely a short term buying opportunity than an extend downturn in propane prices.
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WHAT IS COST MANAGEMENT SOLUTIONS?
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The Propane Price Insider is an email service that provides:
- Three daily price Flash Wires
- Periodic option quotes
- Wednesday inventory data updates around 11 a.m. ET
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Evening report with executive summary, weather maps and complete review of energy prices that are based on propane's Btu equivalent
For a free 10-day trial subscription by email, sign up online here or call 888-441-3338.
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Cost Management Solutions LLC (CMS) is a firm dedicated to the analysis of the energy markets for the propane marketplace. Since we are not a supplier of propane, you can be assured our focus is to provide an unbiased analysis.
Contact us today to see if you can benefit from having the Energy Price Watchdog working for you.
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Many retailers simply don't have time to analyze the large amounts of data to make an informed purchasing decision.
We offer:
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Detailed market recommendations on hedge and pre-buy entry points
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Prompt market execution of hedging strategies
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Supply cost analysis and recommendation as to effective hedging strategies
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Large volume consideration when we place your hedges
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GOT STORY IDEAS? Email Brian Richesson, Editor in Chief
LOOKING FOR ADVERTISING OPPORTUNITIES? Email Brian Kanaba, Publisher
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