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DIGITAL EDITION

August cover


THIS WEEK'S TOPIC:
CRUDE INVENTORY

What high crude inventory means for propane prices
By MARK RACHAL
Cost Management Solutions    
Cost Management Solutions
The Energy Information Administration’s Weekly Petroleum Status Report for the week ending Nov. 13 reported U.S. crude inventory, excluding the Strategic Petroleum Reserve, at 487.286 million barrels. The high for the year was set on April 24 at 490.912 million barrels.

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The current inventory position exceeds anything we have seen. The five-year average inventory position for this point in the year is at 366.690 million barrels. The average change from this point in the year to the end of April the following year has been at 12.835 million barrels. If history holds true, U.S. crude inventory will once again be at a record high to start the summer driving season.

In addition to the total U.S. supply, crude inventory at Cushing, Okla., is growing again.

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Cushing inventory is critical as it is the settlement point for the future of West Texas Intermediate (WTI) crude, which is the U.S. benchmark for crude. Because Cushing is where futures contracts settle, inventory positions there can have a disproportionate impact on the price of WTI crude.

It is typical for Cushing inventory to rise at this point in the year, but the inventory builds over the last two weeks have been above average. In just two weeks, Cushing inventory is up 3.732 million barrels. Those builds certainly put downward pressure on front-month crude prices.

The January contract is now the front-month WTI futures contract. January crude is currently trading at $41.48, while February crude is trading at $42.85. The $1.37 spread is high and is an indication that traders are worried about the rising inventory. Last week, traders were dumping expiring December WTI contracts rather than taking delivery of them at Cushing.

Crude for next December is trading nearly $7 above the January barrel. In a normal supply situation, front-month crude would be higher than crude further out. The current spread action has some traders believing that WTI crude will fall below its most recent low of $37.75 set on Aug. 24.
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The value of crude has a lot of influence on the price of propane. The weakness in crude has propane trading nearer its lows rather than its highs for the year. Since propane fundamentals are also weak with record-high inventory and slack demand, propane is more likely to track the movements in crude. The weak fundamentals are likely to keep propane prices from spiking and separating from crude prices this year.

The pricing environment is good news for propane retailers' immediate supply needs. However, the contangoed crude market, where the further-out futures prices are higher than the front-month prices, also makes propane relatively more expensive in the future. As traders get quotes on financials and pre-buys for later this winter and next winter, they may be a little disappointed in the offers.

Propane prices for the fourth quarter of next year are about 7 cents higher than current prices. Still, for most propane retailers, owning sub-50 propane is very workable and holds little risk of being so uncompetitive as to be a liability. It also provides opportunities to push appealing fixed-priced and budget programs to customers, which could help shield them from competitive pressures or even switching to other energy sources should their furnace or other appliances go out.

Even if quotes on propane futures are not quite as low as one might expect, the current pricing environment still provides excellent opportunities to make our businesses more secure and profitable.


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