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THIS WEEK'S TOPIC:
PROPANE PRICES
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Why are propane prices rising despite inventory builds?
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Propane inventory in the United States has increased by more than 4 million barrels in the past two weeks. One day after the Energy Information Administration (EIA) reported a 2-million-barrel build in propane inventory that pushed inventory to 62 million barrels - a record high for this time of year - Mont Belvieu propane gained 3.67 percent and Conway 3.76 percent.
The sharp gains in Mont Belvieu propane seemed curious, considering Gulf Coast propane inventory is at 40.112 million barrels. On average over the past five years, winters have begun with Gulf Coast inventory at 34.109 million barrels. That means inventory currently stands at 6.003 million barrels more than the five-year-average starting winter position, with an entire summer of potential builds to go.
Last week alone, Gulf Coast inventory increased 1.248 million barrels, so at least for now, the expected slow inventory builds of this summer have not started.
As it stands now, total U.S. inventory only needs to build an average of 291,000 barrels per week over the next 24 weeks to reach its average position on Oct. 1. Over the past five years, the average weekly gain in inventory over that 24-week span has been 1.451 million barrels.
Obviously, builds in inventory are going to have to slow dramatically if U.S. propane inventories are not to eclipse the record high of 81.612 million barrels reached mid-October last year. So why in the world did propane prices gain nearly 4 percent in one day when it had just been hit with more bearish inventory news?
It was because propane is not trading against its own fundamentals. Instead, it is trading against its relative value to crude. The two graphs below chart propane’s relative value to West Texas Intermediate (WTI) crude on a percentage basis. The first is for Mont Belvieu and the second is for Conway.
The red line in the two charts shows the percentage that a barrel of propane was to a barrel of WTI crude for 2015. In February, propane was at about 50 percent of a barrel of WTI, which is normal for that time of year.
But now the value of propane has fallen to around 40 percent of crude and is setting five-year lows against crude. Propane traders are finding propane too good of a relative value to pass up. At this point, big traders have blinders on concerning U.S. propane inventory and are trading against its relationship to crude.
One trader told us that he just didn’t see propane going any lower against WTI crude than it is currently (Mont Belvieu 41 percent, Conway 35 percent) simply because it is seen as too good of a buy by the big players. Another trader presented the idea that big players were shorting propane when crude prices were trending neutral to lower and then covering those shorts on a rally in crude.
When a trader is short propane, he must buy it to close his position. That could explain why propane actually outpaced crude to the upside last Thursday, as crude suddenly broke higher out of a five-day neutral price trend.
If propane inventory continues to build at the pace it has over the past two weeks, there will come a point where traders will decide that propane is overvalued, even at the current low relative values to crude. But for now, propane is considered to be a relatively good value and is highly likely to move up with crude, regardless of the fundamental realities.
We all love a good sale, and most of the time those sale prices provide us something we need at a very good value. For now, that appears to be the case with propane, but when rushing toward the blue light special, one should probably pause to note all of the propane stacking up on the shelves. A good deal is only a good deal until it’s not.
If a propane retailer is buying for programs like fixed price and budget that he will sell to customers in a relatively short timeframe, today’s blue light special will probably work out great for both the retailer and the customer. But if a retailer is speculating, we simply advise not ignoring fundamentals - specifically rapidly rising inventory - completely.
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WEEK IN REVIEW
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Rising inventory made it difficult for propane to keep up with more gains in crude. The latest crude rally has seen West Texas Intermediate (WTI) increase 27 percent. The pressure to take profits on any negative news is growing and could put crude back into the more neutral pricing pattern we saw for five days before the jump last Thursday. Propane is going to get its price direction from crude in the short term.
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LAST WEEK'S HIGHLIGHTS
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Propane prices stayed in a developing downtrend, even as crude prices bounced higher. A report by Genscape that suggested Cushing crude inventory might fall with the next inventory report gave crude its key support.
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Propane prices turned lower on possible defensive plays ahead of what was expected to be another bearish inventory report on Wednesday. Crude faded into negative territory late in the day on what could have been book squaring ahead of the expiration of the May WTI crude futures contract.
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The Energy Information Administration reported a 2.027-million-barrel build in U.S. propane inventory, sending prices down. Data for crude inventory was also bearish, but more supportive data on refined products inventory limited the downside for WTI crude.
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Propane surprised with a strong rally to erase much of the week’s losses. Some believed the gains were caused by short covering that was triggered when WTI crude broke higher out of its neutral pricing pattern. Crude set new highs for the year, as fighting in Yemen gave concern about the security of Middle East crude supplies. But a rally in gasoline was key in pulling crude higher.
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Surprisingly, propane held to Thursday’s gains, even though WTI crude experienced profit taking and moved down slightly. However, for the week, propane remained in negative territory.
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CONNECT
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WHAT IS COST MANAGEMENT SOLUTIONS?
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The Propane Price Insider is an e-mail 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 e-mail, 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
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