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DIGITAL EDITION
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THIS WEEK'S TOPIC:
PROPANE VALUES
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Propane's relative value to crude and its effect on prices
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It has been about six weeks since we looked at propane’s relative value to crude in Trader’s Corner. We are going to touch on it again, as it might help explain the recent strength in propane prices.
With inventory so high, some propane retailers are shocked that propane prices have been on the rise. For the week ending Sept. 4 (week 36 of the year), the Energy Information Administration’s (EIA) Weekly Petroleum Status Report pegged United States propane inventory at 96.556 million barrels.
To put that inventory level into perspective, last year’s inventory did not reach its zenith until week 42, at 81.612 million barrels. That puts this year’s inventory up 14.732 million barrels from last year’s high. That hardly seems like a fundamental environment where propane prices should keep up with or outpace rallying crude, but that is exactly what they have done in recent trade.
On Aug. 24, West Texas Intermediate (WTI) crude posted a close of $38.24. Five trading days later, the close was at $49.20 – a gain of $10.96, or 22.27 percent. During that stretch, Mont Belvieu propane rose 17.81 percent and Conway rose 12.84 percent. However, when crude decreased after Aug. 31, propane prices continued to rise. Through Sept. 10, Mont Belvieu propane closed at 45 cents and Conway closed at 43 cents. This gave Mont Belvieu a 20.55 percent gain and Conway a 25 percent gain since Aug. 24. Mont Belvieu all but matched the gains in crude, even though Gulf Coast inventory is 20.15 million barrels higher than it was at this point last year. Conway outpaced the rally in crude.
We expected propane prices to move higher when crude rallied, but we would not have been surprised if propane’s gains had been less than crude's given inventory levels. We certainly didn't expect propane to continue higher even as crude's rally faltered. In fact, propane's relative value to crude improved this month, continuing a trend that began in June.
The charts above show propane’s value as a percentage of WTI crude’s value. The red line shows this year’s relative value; the blue line shows last year’s value; and the green line shows the five-year average. The gray area represents the five-year high and low ranges.
The first thing to note with the five-year average is that there is generally an increase in propane’s relative value to crude leading into winter. Propane buying begins to increase, and the market begins to anticipate crop drying and seasonal heating demand. Regardless of inventory level, market and psychological forces driving propane prices higher this time of the year are quite strong and fairly predictable. As propane buyers, we should not be shocked that there is at least some uptick in prices this time of the year. However, this uptick has been sharper than normal.
Part of the reason for propane’s sharper-than-normal seasonal revaluation to crude is the fact that propane was trading at record lows to crude this summer. That record low seemed justified given the extremely high inventory level. Still, traders found such values tempting and sellers found them ludicrous, so there was a point when the market lost its drive to decrease.
Propane is rising because of the increase in the value of crude, and it is growing stronger relative to crude because of typical seasonal influences. However, we still may not have completely identified the reason propane has improved in value relative to crude at an above-average pace over the last few weeks.
(continued below)
The contributing factors include, first, the anticipation of new propane export capacity that will be online by the end of the year. Propane sellers are counting on increased capacity to support prices, so they are trying to continue holding prices up now, even in light of the current high inventory position. Second, we are seeing increased unplanned refinery shutdowns in the United States. During the week of Sept. 4, refiners had 480,000 barrels per day (bpd) of capacity offline. It is expected that 1.424 million bpd will be offline during the week ending Sept. 25.
Lower refinery utilization reduces crude consumption, putting downward pressure on crude prices. At the same time, reduced propane production will help tighten propane supplies. Last week, the EIA reported 63,000 bpd, a 3.9 percent decrease in propane production.
That fact provides a fundamental reason for propane’s above-average improvement in relative value. However, some of the above-average improvement is speculative because it counts on increased exports in the future that are likely, but not guaranteed, to occur.
Even with its above-average improvement in relative value in recent weeks, propane is still a relatively cheap Btu, running well below average for this time of year. Indeed, the high inventory level is still having an impact from that standpoint.
A combination of rising crude, seasonal price trends, fundamental changes and speculative interests has driven propane prices higher than most of us anticipated during the last few weeks. In reality, though, propane prices have not overreacted. Recent increases in value, both relative and nominal, are more of a reflection that propane was oversold once traders took into account the recent changes.
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WEEK IN REVIEW
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Propane prices are showing resilience even in the face of record-high inventory. A light inventory build last week seemed to motivate propane buyers and strengthen the resolve of sellers to hold a tight line on prices. We are bullish on propane to start the week.
Crude, on the other hand, is slowly slipping into a new downtrend. Fundamental conditions remain bearish. Our prices outlook will be bearish for crude this week.
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LAST WEEK'S HIGHLIGHTS
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The industry took holiday Monday for Labor Day.
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U.S. refinery issues lowered WTI crude even though Brent went sharply higher on good euro zone economic data. Propane showed a great deal of strength climbing despite the fall in crude.
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Propane resisted a $1.79 fall in crude, which was impacted by oversupply concerns. Equities markets turned lower, putting a bearish tone to the market. Propane sellers remained firm on prices, anticipating that increased export capacity by year’s end will tighten inventory.
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Propane posted big gains on a light inventory build and a big bounce in crude prices. Crude traders shook off a larger-than-expected build in overall U.S. crude inventory and keyed in on an 897,000-barrel drop in Cushing, Okla., crude inventory and an increase in gasoline demand to recover Wednesday’s losses.
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Crude prices fell, but propane continued to resist the fall. A drop in rigs drilling for crude in the U.S. helped crude come off its session lows.
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CONNECT
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WHAT IS COST MANAGEMENT SOLUTIONS?
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The Propane Price Insider is an email 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 email, 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.
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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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