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Click here for a free, 10-day trial of The Propane Price Insider!
Dear Propane Price Insider readers:
On Oct. 6, your PPI newsletter is getting a makeover. In addition to a fresh redesign, the newsletter is undergoing a name change. It will be called Trader's Corner. The new name will reflect the strategic role that propane marketers play – deciding when to buy and sell their supply in order to protect customers in a volatile energy market and maximize business profits. Please be on the lookout for this name change in your inbox so you won't miss this valuable weekly propane market report.
Trader's Corner
This week’s Trader’s Corner looks at how the value of the dollar can affect crude and propane prices.
In today’s Trader’s Corner, we want to show why propane retailers have to be part economist to do their job correctly. That’s right; in addition to all the other hats you wear, you also need to keep an eye on economic conditions, how those conditions affect the value of the dollar, and how the value of the dollar can affect crude and propane prices.
We hope we don’t get too much resistance when we say the price of propane is highly related to the value of crude. Over the years, most of us have seen that, the majority of the time, propane prices move in the general direction of crude. Certainly, there are times when the two disconnect, especially when propane fundamentals take over as the driver for propane prices. But in general, over time the two have been closely connected.
So if we believe that propane prices are influenced by the value of crude, then we have to be aware of what affects the value of crude. Unfortunately, that list is long and distinguished. We are all too aware that the latest crisis around the world always seems to be a threat to crude supplies and is a justification for crude prices going higher.
Also, it’s easy for most of us to watch crude and refined product inventories, refinery throughput, and many of the other fundamental factors that affect the cost of crude and thus, the cost of propane.
One important factor that is not as clear or as easy to follow is the impact of the value of the U.S. dollar on the value of crude and, by relationship, the value of propane.
As we write this, the leaders of the U.S. Federal Reserve and other central banks are meeting in Jackson Hole, Wyo., to discuss monetary policy. Their decisions will affect the value of the U.S. dollar, the euro and other global currencies. Traders of those currencies will react to the speeches from Janet Yellen, the chair of the U.S. Federal Reserve, and Mario Draghi, the president of the European Central Bank, that they will give when the meeting concludes.
Our daily reports often have a section in the executive summary that focuses on economic data because economic conditions can affect energy demand. But it also can affect the decisions of central banks concerning monetary policy. Those monetary policy decisions affect the value of currencies used around the world.
The impact on the dollar is of critical importance because commodities such as crude are traded in dollars. Many around the world don’t like this; there is an ongoing battle to trade crude in other currencies. But for now, the dollar reigns supreme.
In general, the dollar and crude trade opposite of each other. In other words, when the dollar goes higher, it generally pushes crude prices lower. When the dollar goes lower, the price of crude goes higher. Below is a chart that clearly shows this inverse relationship. It is particularly clear for the recent downtrend in crude.
In the chart above, we can see times when the dollar and crude go in the same direction because of the right combination of economic conditions and/or crude fundamentals or because of the impact of geopolitical events, especially on crude. But over time, we often see the two go in opposite directions because, all things being equal, there should be an inverse relationship.
Let’s say producers get $100 for a barrel of crude. The dollars they receive represent their ability to buy the things they need or want. If the dollar’s value is high relative to other currencies, their purchasing power increases even though they don’t get more for their oil. However, if the dollar falls in value, the owners of the crude want to get more dollars for it to keep their purchasing power the same.
When global sellers exchange crude for dollars and the dollar’s value is relatively high compared with say, the euro, they can get more euros for their dollar and therefore purchase more goods and services in the Eurozone.
At the end of June, the dollar was worth 79.8 cents against other currencies. Today, it is worth 82.4 cents. It doesn’t sound like much, but this is a difference of more than 3 percent. If crude prices had stayed the same, the seller of crude would have received a 3 percent raise. When we are talking millions of barrels per day in global crude consumption, it's a lot of money.
The recently rising dollar takes price pressure off crude and therefore contributes to the fall in crude. The dollar has been stronger because the U.S. economy is getting stronger. Therefore, the U.S. Federal Reserve is getting closer to tightening its monetary policy. Taking dollars out of the system will improve the value of the dollars remaining. West Texas Intermediate (WTI) crude is down 11.8 percent since June 30, so more has been at play than just the dollar contributing to crude’s decline.
With crude already down nearly 12 percent since June 30, traders are looking for a reason to buy crude if, for no other reason than because the current price looks tempting given what it was recently.
If the statements that come out of the Jackson Hole meeting are bearish for the dollar, it could be bullish news for crude. If you are looking for when the downtrend in crude might end, the outcome of that meeting and the statements made following it will be very important.
This may be more than we want to know or even attempt to keep up with. Nevertheless, we can’t stick our heads in the sand and think that what’s going on in Jackson Hole can’t affect our propane business, because it certainly can.
Most propane retailers wear too many hats to add an economist’s to the collection. That makes having a reliable, thorough source for getting pertinent information that could affect our propane business important to our success.
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
We are neutral on crude and propane going into the week. Propane slipped a little on the recent inventory builds. With crude deep into a long downtrend, and crop drying and winter heat demand just ahead, it's hard to be bearish, even with the recent weakness.
LAST WEEK'S DAILY HIGHLIGHTS
Monday: Crude prices remained volatile and propane prices soft to start the week. Worries about crude demand and improving crude production in Libya pressured crude. Propane’s price remained affected by the 1.8-million-barrel, above-average build in propane inventory reported by the Energy Information Administration (EIA) Wednesday.
Tuesday: September WTI crude fell sharply a day ahead of its expiration. Brent was up, suggesting there could have been an unwinding of crude spread plays that were placed earlier in the month. Propane defied crude, finding enough buyers to move higher and erase much of Monday’s drop.
Wednesday: The EIA reported a propane inventory build of 2.5 million barrels, almost double the five-year average build for week 33 of the year. A million barrels of the build was in the Midwest, sending Conway prices down 1 percent, but Mont Belvieu prices held firm despite a 1.2-million-barrel build in Gulf Coast inventory. September WTI crude rallied on late buying, just before its expiration.
Thursday: A surprisingly bearish reaction continued in Conway following the reported inventory build made by the EIA on Wednesday. Mont Belvieu’s loss was minimal, causing Conway to give up its premium to Mont Belvieu. Just last week, Conway was as much as 3 cents higher than Mont Belvieu. October crude opened as the front month, a couple of dollars below where September crude had closed on Wednesday. The contract moved higher, primarily on the back of good U.S. economic data.
Friday: Propane remained weak, with both hubs losing five-eighths of a cent and closing at 101.5 cents. Crude was once again a weight on propane. Crude buyers were more concerned about weak demand than supply threats.
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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.
Market Information Services
The Propane Price Insider, an e-mail service that provides:
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Three Daily Price Flash Wires
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Periodic Option Quotes
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Wednesday Inventory Data Updates around 11 a.m. ET
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Evening Report with Executive Summary, Trader's/Hedger's Corner, Weather maps and complete review of energy prices that are based on Propane's Btu Equivalent
Free trial!
For a free 10-day trial subscription by e-mail, sign up online here or call toll-free at 888-441-3338.
Client Services
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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Because of the volume of transactions we place annually, we receive large volume consideration when we place your hedges
Visit us online at www.propanecost.com. Or e-mail info@propanecost.com.
Contact us today to see if you can benefit from having the Energy Price Watchdog working for you.
Dale G. Delay 888-441-3338, ddelay@propanecost.com
Mark Rachal 888-441-3338, mrachal@propanecost.com |
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