Comparing imports, exports and propane’s relative value to crude

Chart: Cost Management Solutions. Click to enlarge.

In last week’s Trader’s Corner, we looked at declining propane production and its contribution to tighter propane supply and demand fundamentals, which have caused a rebound in propane’s value.

On March 23, Mont Belvieu LST and Conway traded at their year’s low of 20.75 cents and 20.5 cents, respectively. Since then, MB LST is up 17 cents, or 81.93 percent. Conway is up 21.5 cents, or 103.66 percent, and is carrying a 4-cent premium to MB LST. Part of the reason for the strength in Conway is that propane production in the Midwest has dropped off faster than it has on the Gulf Coast.

Another reason could be a tighter import market. A major surge in propane imports, 95 percent of which come from Canada, occurred last week. But, prior to that jump, propane imports have been running well below last year.

Chart: Cost Management Solutions. Click to enlarge.

Including last week’s big surge, U.S. propane imports have averaged 137,000 barrels per day (bpd) through the 17th week of the year. Imports averaged 180,000 bpd over the same 17-week stretch last year. That is a difference of 43,000 bpd. That may not sound like much, but it is the equivalent of 180 transport truck or 60 rail car loads per day. Over the course of 17 weeks, that is a lot of supply.

U.S. propane/propylene production has still averaged more than it did last year — by 153,000 bpd. But the year-over-year increase has been steadily coming down, as we discussed last week. Over the last two weeks, U.S. propane production has been less than it was during the same week last year. Any way you look at it, propane supply is much tighter this year than it was last year.

Over the same 17-week period, propane exports have been higher than last year. So far this year, exports have averaged 213,000 bpd more than last year. That is the equivalent of 894 truck or 298 rail car loads.

Chart: Cost Management Solutions. Click to enlarge.

At the same time that propane fundamentals have gotten tighter, crude has been extremely oversupplied. The two charts to the right show propane’s relative value to crude for Mont Belvieu LST followed by Conway.

Propane has recently traded at extreme highs relative to WTI crude. Even after everything settled down with crude, propane values are running at five-year highs relative to WTI crude. Much of the higher relative values can be blamed on crude, but if the market did not perceive propane fundamentals as becoming more supportive, its relative value would not have increased so much. As you can see, the perception of propane’s fundamental condition was just the opposite at the beginning of the year as it was setting five-year lows to WTI crude.

Chart: Cost Management Solutions. Click to enlarge.

Crude’s value has been improving recently, and it is likely to continue to do so in the coming weeks and months as economic activity resumes. That is going to lower propane’s relative value, but our guess is that propane’s more supportive fundamental picture will keep it from falling to the extremely low values witnessed at the beginning of the year.

Propane has been going through a weak period fundamentally that has kept its price depressed. For the most part, propane retailers have been rewarded for not buying propane in advance of when it was needed. This has been going on for about two years now. It is easy to get lulled into a false sense of security. At this point, we can safely say fundamentals are pointing toward the need for more protection against higher prices this year than we have seen at any time over the last two years.

Call Cost Management Solutions today for more information about how Client Services can enhance your business at (888) 441-3338 or drop us an email at info@propanecost.com.