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Trader's Corner

This week’s Trader’s Corner looks at Midwest propane inventory.

The rapid build in U.S. propane inventory this summer has been welcome news for propane retailers and consumers. Inventory was low coming out of last year’s harsh winter. Early inventory builds were below normal, adding a bit of uneasiness about where inventory would be positioned for this coming winter.

Nearly two months of above-average U.S. inventory builds have put many of the fears about inventory to rest. However, all regions are not created equal. In fact, there is much concern about the state of propane inventory in the Midwest.

Last winter, the Midwest struggled with a lack of inventory. By contrast, the Gulf Coast region never struggled with having enough inventory — the issue was always getting the inventory where it needed to be because of recent changes in the propane pipeline infrastructure.

With the struggles faced in the Midwest last year because inventory ran low, the hope was that more inventory would accumulate in the Midwest in preparation for this coming winter. After all, the value of propane in Conway would have returned a very nice gain to a producer that had his barrels positioned there last winter.

Inventory was low going into last winter because producers who had suffered a couple of years of Conway propane steeply discounted to Mont Belvieu suddenly had options to move production directly to the Gulf Coast. They were eager to push barrels south when the option to do so became available because it allowed them to access a larger petrochemical market, and of course, a rapidly expanding export market.

Still, the hope was last winter’s high prices might encourage more barrels to be placed in the Midwest this year. The graph on inventory above shows that has not been the case. In fact, inventory is below last year’s and set a new five-year low for week 26 of the year last week. The builds in inventory started off encouragingly, but over the past four weeks, the build trend has not been good, leading to the current low levels.

What we must understand from the producers’ perspective is that they are not just considering the value of propane in their decision-making. They are producing ethane, butanes and natural gasoline, in addition to propane. For those products as well, the Gulf Coast is the market with the most options.

It is more efficient for producers to send their natural gas liquids mix directly to the Gulf Coast to have it fractionated there. That fact has reduced fractionation in the Midwest and resulted in low propane inventory levels. Low inventory levels are the last thing a propane retailer wants to see after last year’s nightmare. With the Cochin line completely lost this year, the sequel to last year could be even more horrifying.

There are capabilities to return finished propane back to the Midwest market from the Gulf Coast. Oneok’s products line between Conway and Mont Belvieu is bidirectional. We have to hope that line will be reversed this winter to take propane back to the Midwest.

Economically, we can see the inefficiency of fractionating in the Midwest and then trying to batch all the finished products to the Gulf Coast market. What would seem to make more sense is fractionating in the Gulf Coast and sending what product is needed in the Midwest back through the finished products line.

While the inventory situation looks grim in the Midwest at the moment, there is plenty of propane in the United States, especially the Gulf Coast. In fact, there is a very real possibility of inventory being above 80 million barrels at the start of winter. We have to hope plans are in the works to move some of that inventory that is currently overweight in the Gulf Coast back to the underweight Midwest market this winter.

Otherwise, it will be a crying shame to once again see a bunch of propane inventory sitting in the Gulf Coast struggling to get through the available infrastructure to where consumers are demanding it, while the Midwest is starving for supply. Frankly, this is one sequel we don’t want to see; we would give it a resounding thumbs down. Surely with last year as a reminder, and a year to prepare, we will see the execution of plans to move propane from the Gulf Coast to the Midwest this fall.

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 prices continued their downtrend that started June 13. Less concern about the disruption of Iraqi crude supplies following the Sunni uprising and hope that the situation in Ukraine will be resolved without Russia taking military action took some of the geopolitical premium out of crude.

Rising U.S. propane inventory makes it difficult for propane prices to fight against the crude downtrend. We go into the week bearish.

LAST WEEK'S DAILY HIGHLIGHTS
No day-by-day summary due to the July 4 holiday.


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COST MANAGEMENT SOLUTIONS
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.

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