|
Click here for a free, 10-day trial of The Propane Price Insider!
Call Cost Management Solutions today at 888-441-3338 for more information about how Client Services can enhance your business or drop us an email at info@propanecost.com.
Trader's Corner
This week’s Trader’s Corner looks at the price relationship between the major Canadian and U.S. trading hubs.
A couple of weeks ago, we had a conversation with one of our clients about what he was seeing in his local market, with product coming out of Edmonton, Alberta, Canada. He was a bit surprised to see where Edmonton was trading relative to Conway.
Based on that conversation, we put together a comparison of the recent price history between Belvieu, Conway, Sarnia (in Ontario, Canada) and Edmonton for our daily readers that week. This Trader’s Corner looks at that study, with prices updated through June 13. Click the charts to enlarge them.
Looking at propane pricing at the four major propane hubs located in the U.S. and Canada might give us good insight into the latest trends in propane inventory. First we need to understand there is a push back and forth between all of the supply points to fill demand – what is happening in any one of them can influence the others. However, the strongest interaction/competition comes between Conway/Edmonton on the one hand and Belvieu/Sarnia on the other because of existing transportation infrastructure.
The dramatic drawdown of Canadian inventory to close winter pushed Sarnia prices sharply higher against Belvieu. On average in 2012, Sarnia traded at a slight discount to Belvieu. But so far this year, Sarnia has traded at a 26.054-cent premium.
That has allowed Gulf Coast supplies to push more effectively against eastern Canadian supplies. The result would be a slowdown in the buildup of Gulf Coast inventory, which was occurring until last month.
However, the spread has come down recently to Sarnia at Belvieu plus 13. Sarnia/eastern Canada is starting to fight back to gain market share. If that trend continues, it should back up Gulf Coast inventory and allow for higher builds in inventory on the Gulf Coast.
The table below shows the price spread between hubs. The numbers represent the price of the first location in the pairing relative to the second location in the pairing. For example, in 2012-13, Belvieu has averaged 14.64 cents above Conway; Sarnia has averaged 7.751 cents above Belvieu; and Edmonton has averaged 13.025 cents below Conway.
We have certainly observed that over the last few weeks, as builds in Gulf Coast inventory have transitioned from below normal, to normal and then last week almost a million barrels higher than normal.
Edmonton has consistently benchmarked off Conway at somewhere around minus 13.5 cents. This allows western Canadian production to move into Midwest U.S. markets.
The spread there also collapsed with the drawdown in Canadian inventory, but now it is widened again. In fact, Edmonton is getting priced aggressively at Conway minus 15.875.
That is a likely cause of Midwest inventory to experience some above-average builds. And that, of course, was causing Conway’s discount to Belvieu to increase, as we showed in our Trader’s Corner last week.
But since that report, the spread has tightened. It has gone from Conway trading at Belvieu minus 6.5 cents to Belvieu minus 4.25 cents. The larger builds now occurring on the Gulf Coast aided the tighter spread. And as mentioned earlier, those builds are related to more aggressive pricing in Sarnia. On average this year, Conway has traded at Belvieu minus 5.172 cents.
Ultimately the supply/demand balance dictates a north-to-south and west-to-east movement, since the Gulf Coast has the most options for production, with export capabilities and petrochemical demand. Of course, the U.S. East Coast is the highest retail (non-petrochemical) demand area for North America.
Currently Edmonton has the fewest options for its production and therefore must price aggressively against Conway to make barrels move. But there are plans in the works to connect Edmonton and Sarnia, which will provide more options and likely a better netback for western Canadian producers.
If and when those projects are complete, it will change the dynamics of the North American propane supply picture and thus initiate another period of market adjustment.
It might be best to imagine the four major supply hubs as armies engaged in constant fighting where the front lines of battle are in a state of perpetual flux. When more troops (supply) are added to an army (supply point), that army captures more territory. But the other armies are forced to respond to its enemy’s offensive as its battle lines consolidate.
As retailers, it is easy to become fixated on the hub that provides the bulk of our supply and, in some cases, to only be concerned with a supply point or two in our market place. But it is important to remember that the price we pay for supply is influenced by a much broader supply/demand dynamic. Our discussion today didn’t even account for the fact that North American propane supply is now in a global battle for market share.
Call Cost Management Solutions today at 888-441-3338 for more information about how Client Services can enhance your business, or drop us an email at info@propanecost.com.
WEEK IN REVIEW
Crude went higher, with threats to Middle East crude supplies and a falling dollar in support.
Weak fundamentals kept propane in a downtrend.
Crude is bullish, but propane is disconnected from crude at the moment, trading only on its own fundamentals. We start the week bearish.
LAST WEEK'S DAILY HIGHLIGHTS
Monday: Disappointing data on China’s economy had crude traders taking profits on last Friday’s gains. Propane demonstrated the same weakness present last week as both hubs fell more than crude.
Tuesday: The Bank of Japan decided not to expand upon its recent $1.4 trillion economic stimulus package, causing crude to extend losses into a second day. Propane fell inline with crude.
Wednesday: Bearish U.S. propane inventory data, especially for the Gulf Coast, sent propane prices down sharply. Crude inventory built against an expected draw, but a weak dollar was enough to push crude higher.
Thursday: Positive data on U.S. retail sales and jobless claims had crude up for a second day. Propane trade seemed largely influenced by the previous day’s inventory report. Conway was higher with crude as the inventory report for Midwest propane was fairly neutral. However, Belvieu struggled after a Gulf Coast inventory build of 1.111 million barrels that was about four times higher than average for week 23 of the year.
Friday: The U.S. agreed that the Syrian government had used chemical weapons and said it would therefore provide more military assistance to Syrian rebels, sending Brent and West Texas Intermediate crude higher. Propane once again could not follow a strong move in crude, demonstrating a bearish view of propane fundamentals by traders.
|
