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DIGITAL EDITION
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THIS WEEK'S TOPIC
PROPANE PRICES
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Finding motivation in propane price opportunities
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Throughout the years, Cost Management Solutions has seen a number of patterns develop. Many of these patterns, such as seasonal pricing patterns, are fairly well known by propane retailers. We are all aware of the seasonal patterns of propane inventory builds and draws.
However, there is one pattern you may not be aware of because it is generally only apparent to consultants who work with propane retailers. This pattern has probably taught us more about the mindset of propane retailers than any other pattern we follow. It is known as the “phone-ringing pattern.”
Though highly unscientific, this pattern is as clear as day and as consistent as the rising and setting of the sun.
Here are the characteristics of the pattern:
- When propane prices are falling or steady, our phone does not ring.
- When prices are just beginning to rise or are rising slowly, our phone rings occasionally.
- When prices are rising fast, or when they have moved at least 10 percent above recent lows, the ringing increases.
- When prices have been moving higher for a while and are 20 percent or more above recent lows, our phone is almost constantly ringing.
What this tells us about propane retailers is that they are motivated by threats, not opportunities. This edition of Trader’s Corner focuses on framing an opportunity and changing the phone-ringing pattern just a bit.
Currently, crude prices are at lows not seen in 12 years. Propane prices are greatly influenced by the price of crude. Propane fundamentals, such as inventory levels and demand, will push propane prices around, too. The more bearish propane fundamentals are, the lower propane prices are relative to crude prices. The more bullish propane fundamentals are, the higher propane’s relative value to crude.
As the chart above shows, the high inventory levels and low-demand winter have propane prices well below normal valuation compared to West Texas Intermediate crude. In fact, propane set five-year low valuations to crude for much of last year. The relative valuation is higher now but still very appealing from a historical perspective.
Another important point in defining the current opportunity for propane retailers is the value of crude in the future. The further into the future we look at propane prices, the less influence propane fundamentals have on them and the more influence crude prices have on them. Because traders believe the recovery in oil prices will be slow, the price of crude in the future has dropped more than normal relative to the current month. This means that not only is the current price of propane appealing, but the future price represents opportunity as well.
The table above shows the price at which propane retailers could own propane at the two primary U.S. hubs for the next two and a half winters. Retailers can use financial instruments called swaps to fix the above prices on as much of their future propane use as they desire.
In conjunction to fixing the price of propane at the hubs, using the swaps, retailers could negotiate with their physical supplier to buy at a fixed relationship between the hub where they hold swaps and where they pick up their physical supply.
For example, a propane retailer in the Northeast would likely own swaps based on Mont Belvieu. He would then buy from his physical supplier at a pipeline terminal off the TET pipeline at Mont Belvieu plus a fixed differential – say 20 cents. He could buy at a gas plant or a refinery using the same process.
With those two pieces in place, a retailer would have a known cost of supply at a given supply point of 59 cents next winter, 60.125 cents during the winter of 2017-18 and 60.5 cents in the first half of the winter of 2018.
(continued below)
In April, Cost Management Solutions will hold a workshop that will teach propane retailers how to identify and take advantage of these opportunities. In that workshop, retailers will learn how the financial tools needed to take advantage of these opportunities work. They will be given access to trading relationships necessary to enter into these financial agreements. They will also discover what financial tools are best in meeting goals and addressing customer needs.
Frankly, this process is very simple, and many propane retailers have been using it this month to find out their future supply cost over the next three winters. (Even though swaps aren’t available for the first quarter of 2019 yet, there is still a strategy for covering those months.)
If you are tired of reacting to your competitors and being jerked around by propane markets, you owe it to yourself to take control of your business and your relationship with your customers. The first step is to attend our seminar in April. Our ad above tells you how to sign up.
We want our phone to ring when the market is providing you with an opportunity. If you do, you will never feel the need to call us when markets have gotten away to the upside and the opportunity is long gone. Together we can break the old phone-ringing pattern and make it a thing of the past.
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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.
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
LOOKING FOR ADVERTISING OPPORTUNITIES? Email Brian Kanaba, Publisher
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