Big draws on propane inventory a warning to retailers

From Jan. 15 through Jan. 29, U.S. propane inventories fell 11.857 million barrels.

On average over the last five years, the same two-week period has averaged a draw of 5.102 million barrels, which means the inventory draw of the last two weeks was 6.755 million barrels higher than normal.

Domestic demand over the last two weeks averaged 1.906 million barrels per day (bpd). The five-year average demand over the same two-week period is 1.570 million bpd. The high domestic demand has caused 4.697 million barrels more than average to be drawn from inventory since Jan. 15, leaving 2.058 million barrels of draws unaccounted for over the last two weeks. Additionally, propane exports are running 294,000 bpd higher this January than last. During those two weeks, that would be an increase of 4.116 million barrels of exports.

From last January to this January, propane production has only increased by about 90,000 bpd. We have been reporting how the growth rate of propane production has slowed with decreased drilling activity. This means production would have only been 1.260 million barrels higher this year than last year over the two-week period we are considering, resulting in increased exports outpacing increased production by 2.856 million barrels. That number more than accounts for the balance of the seemingly exceptional high inventory draws of the last two weeks.

As propane retailers, we need to consider all of this data when assessing the risk to propane prices. The data shows that the increases in exports have been more than enough to offset increases in propane production. The rate of growth in propane production is most likely to continue to fall with decreased drilling activity.

That means as long as propane demand is normal to above normal, propane inventory is likely to draw at an above-average rate in the winter and build at a below-average rate in the summer. While propane inventory could most certainly be above last year’s record 53.744 million barrels coming out of winter, the data clearly shows it is much less likely that propane inventories will again match the 106.202 million barrels that were accumulated before this winter started.

The bottom line is that current data suggests the beginning of a phase of tightening U.S. propane inventories and thus increasing upside risk to prices if U.S. domestic demand is normal to above normal. Consequently, we believe market conditions have shifted from favoring being short future supply needs to being long.

To anyone who is interested in learning how to manage the risk to rising prices and why upside price risk is increasing, please consider attending Cost Management Solutions’ hedging workshop in April prior to NPGA’s Southeastern Convention & International Propane Expo.

For more Cost Management Solutions analysis of the energy market that helps propane retailers manage their supply sources and make informed purchasing decisions, visit www.lpgasmagazine.com/propane-price-insider/archives/.