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Trader's Corner
This week’s Trader’s Corner looks at factors influencing propane imports and exports.
We all know that propane exports have been running high and causing pressure on propane inventory. At the same time, propane imports have been running low, making the situation worse.
There was hope that, as U.S. propane exports increased, imports from Canada would help keep inventory adequate. However, low inventory in Canada is limiting propane imports from north of the border.
With propane inventory running low, the price relationship between the four major hubs of Belvieu, Conway, Edmonton and Sarnia has changed.
Sarnia has been the price leader all year, which limits imports, but now Edmonton prices are quickly catching up. Edmonton used to price well under Conway to help product in western Canada push into U.S. markets.
But with inventory tight, there is no pressure to move barrels to the U.S., and Edmonton prices have risen to well above Conway prices. For the most part, current pricing flies in the face of what one would expect.
With so much new export capacity and high petrochemical capacity on the U.S. Gulf Coast, it seems logical that Belvieu would be pricing the highest, followed by Conway, Sarnia and Edmonton. For the most part, tight inventory has caused the pricing relationships to be inversed of what it would seem infrastructure would dictate.
Obviously, with Canadian propane priced so much higher than U.S. propane, the prospect of propane imports from Canada to relieve some of the tightness in the U.S. is greatly reduced.
Interestingly propane prices fell last week despite a bullish inventory report. Part of the reason was word on the street that U.S. propane exports might be temporarily reduced to allow for butane exports. Butane inventory is high, which has created opportunities for more exports and for petrochemicals to consume more butane and less propane. Both of these developments would be welcomed news for propane retailers. Certainly the pullback in prices last week, partly based on that potential, has already been a welcomed relief.
The chart above shows U.S. normal butane and butylene inventory from the U.S. Energy Information Administration. This data lags by two to three months, but we can see that inventory was at record highs in September and industry reports suggest it has not come down as much as normal over the last three months. The high butane inventory and the rise in U.S. propane prices have opened the door for a more robust butane export market.
As propane retailers, we need to be aware that this condition with butane has the potential to relieve a concerning propane inventory situation. However, at this point, there is no proof any of this will take the pressure off of propane inventory. There are plenty of logistical reasons why butane may not supplant propane export volumes, so we must be cautious not to overreact to the possibility. Ultimately it will come down to how propane inventory reports unfold. They have been nothing but bullish this winter.
But propane price movement last week obviously reflected a belief that the inventory picture could get better if propane exports are reduced and petrochemicals favor ethane and butane over propane for the rest of the winter. With so much uncertainty, we still like call options if you think you are short supply for the balance of winter and put options if you think you are too long and especially if you are sitting on good gains from positions bought earlier this year.
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
Finally there was a little break in rising propane prices, but inventory positions remain a major concern. Crude experienced gains with renewed investor confidence following good economic news and a modest change by the Federal Reserve in U.S. monetary policy. Gasoline is gaining on good domestic demand and distillates on strong exports. We are neutral on our outlook for propane prices this week.
LAST WEEK'S DAILY HIGHLIGHTS
Monday: Failure to open Libya’s export terminals over the weekend as promised sent crude prices higher. Conway propane rebounded on good trading volume on Monday despite softness that developed to end the previous week.
Tuesday: Crude prices slipped as the Federal Reserve started a two-day meeting on monetary policy. Propane prices were showing signs of lost upward momentum, as milder weather reports seemed to soften up sellers.
Wednesday: Propane inventory had another bullish 2.659-million-barrel draw, but propane prices surprisingly fell. Crude was up along with U.S. equities as the Federal Reserve announced a minor cut in its bond-buying program, but assured markets of low interest rates for an extended time.
Thursday: Propane prices fell sharply, even as crude moved higher in a post-Fed rally. Large financial institutions were said to be closing propane positions. There were also rumors of lower propane exports as an excess of butane took up export capacity.
Friday: Propane prices were down early, but were showing signs of bouncing back by the end of the day. It looked like some of the early-week selling pressures might be relaxing. West Texas Intermediate crude was struggling to gain against technical resistance, with trading volume low. |
