DIGITAL EDITION THIS WEEK'S TOPIC: PROPANE'S VALUE The cost, relative value and equivalent value of propane By MARK RACHAL Cost Management Solutions     The commodity in which propane retailers deal is traded in cents per gallon. For a certain number of cents, a propane retailer can own a gallon of propane. For a few cents more, the retailer’s customer can own that same gallon of propane. It is fairly easy for a retailer to know the cost of propane at a particular location. The most significant locations in the United States are the trading hubs of Mont Belvieu, Texas, and Conway, Kan. The table above is part of a larger price table we send our daily subscribers three times a day. It gives the cost of propane in cents per gallon at the two hubs at a specific time. The cost is constantly changing. The table also shows what the cost of propane was at the close of trading the previous day, and how much the cost of a gallon of propane has changed from the previous day. The chart above plots propane’s closing cents-per-gallon cost from the first table so a retailer can see the price trend. Because crude is such an important factor in determining the cost of propane, West Texas Intermediate (WTI) crude is added to the chart so retailers can follow the pricing trend of crude, too. WTI is the U.S. benchmark for crude. We distribute this trend chart once a day with our afternoon report. But because crude is traded in dollars-per-barrel, the relative value of propane that is traded in cents-per-gallon is really hard to figure using the chart above. We can see the trends and we can deduce that the cost of propane is going down while the cost of crude is going up. That is probably a good thing for a propane retailer and his customers, but just how good is it? The chart above answers that question. It shows propane’s relative value to crude. Our daily readers can link to this chart and a chart for Conway from the latest evening report anytime they wish. The red line is plotting a simple percentage of what Mont Belvieu propane is trading relative to WTI crude. The red line is the percentage for 2015. Currently, Mont Belvieu propane’s cost is about 32 percent of WTI crude. Since February, propane’s relative value to WTI has been falling because of rising propane inventory and strong speculative interest in WTI. Since late March, Mont Belvieu propane has been setting new five-year low relative values to WTI crude. In fact, the current relative value is a modern day low. We have looked at propane’s cost, or nominal value, and its relative value to WTI crude. But there is another value that is important to know: equivalent value. When a customer buys a gallon of propane, does he really want a gallon of propane? Not really. What he really wants is energy to heat his home and water. A common unit of measure for energy is a British Thermal Unit (BTU). Knowing the cost in BTUs of each energy source is very valuable information. What is even more valuable to a propane retailer who sells propane in cents-per-gallon is how other energy sources compare in cost to his gallon of propane. Because a gallon of propane contains 91,500 BTUs of energy at a certain cost-per-gallon, then it is valuable to know the cost of 91,500 BTUs for other energy sources. That is exactly what the table above shows. It is part of the same table that appears at the beginning of this newsletter and that we send our customers three times a day. From the first table at the top of this newsletter, we know at that moment in time that Mont Belvieu propane cost 44.25 cents per gallon, or 44.25 cents per 91,500 BTUs. In the table above, the numbers in blue provide the equivalent value of other energy sources. For example, 91,500 BTUs of WTI crude was trading on the New York Mercantile Exchange at 96 cents, more than double the value of an equivalent BTU value of Mont Belvieu propane. Knowing the cost of propane is primarily what a retailer is concerned with. But knowing relative values and equivalent values of other energy sources helps a retailer know where his BTUs fit into the overall world of energy. This is important information for buying, pricing and marketing propane. Currently, it is a good time to be a propane retailer and a consumer of propane. The cost of propane is low and its relative and equivalent values are very favorable. WEEK IN REVIEW Building U.S. propane inventory continues to be a weight on propane prices. Crude is getting help from gains by the Islamic State in the Middle East that threatens to destabilize the region. Still, crude does not have fundamentals in support of its current price. Inventory positions in the Midwest are more supportive to Conway pricing than Gulf Coast inventory is to Mont Belvieu pricing. We will start this week with a neutral price outlook for Conway and West Texas Intermediate crude and a bearish outlook for Mont Belvieu propane. LAST WEEK'S HIGHLIGHTS Propane was down more than 2 percent as concerns about higher inventories dominated trade. Crude was supported by fighting in the Middle East, but a bearish price forecast for crude by Goldman Sachs eventually caused prices to slip. Propane pushed toward lows for the year with losses in excess of 3 percent as crude tumbled. A rising dollar and too much crude supply undermined crude markets and threatened to kill a long-running uptrend. A bullish inventory report for crude and gasoline from the Energy Information Administration pushed crude prices higher. However, a 2.583-million-barrel build in U.S. propane inventory would not allow propane prices to follow the gains in crude. Once again, high inventory concerns prevented propane from following crude higher. Crude jumped as the Islamic State made gains across the Middle East and North Africa, threatening stability to the region with the highest oil production in the world. May propane prices at both Mont Belvieu and Conway set new lows for the year. Crude retreated on profit taking and a firmer dollar ahead of the long holiday weekend. CONNECT WHAT IS COST MANAGEMENT SOLUTIONS? 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 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. 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. Dale G. Delay, 888-441-3338 ddelay@propanecost.com Mark Rachal, 888-441-3338 mrachal@propanecost.com Many retailers simply don't have time to analyze the large amounts of data to make an informed purchasing decision. We offer: Detailed market recommendations on hedge and pre-buy entry points Prompt market execution of hedging strategies Supply cost analysis and recommendation as to effective hedging strategies Large volume consideration when we place your hedges GOT STORY IDEAS? Email Brian Richesson, Editor in Chief LOOKING FOR ADVERTISING OPPORTUNITIES? Email Brian Kanaba, Publisher You are currently subscribed to Trader's Corner as %%EMAILADDR%%. Forward to a friend  | Change your subscription preferences  |   New subscriber sign-up If you wish to leave this mailing list, simply unsubscribe. | Refer to our Privacy Policy. 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