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Conway propane sellers treating high inventory as temporary

August 12, 2016 By and    

A lack of available storage options in Conway is having a profound effect on propane prices.

160805 Midwest inv

Midwest propane inventory is currently at 28.751 million barrels, which is 2.6 million barrels above where it was this time last year. It is also just 1.053 million barrels below the highest Midwest storage level seen last year, and at least eight weeks remain in the typical propane inventory build period.

The lack of storage availability is pushing the price of August propane down relative to later months. Propane buyers looking at the price of August propane might be disappointed in the price they’ll pay for winter product, especially in Conway.

160805 August price

The table above is part of a more comprehensive table we use to keep our daily subscribers and clients up to date on market prices. This price was captured at 9:47 a.m. Friday, Aug. 5. Note the significant price spread between Mont Belvieu (42.75 cents) and Conway (35.75 cents).

160805 Out month table

This next table above shows propane prices September 2016 through March 2017. This is our estimate, based on deals done and conversations with traders, of what a buyer of propane for these future months might pay as of last week.

The spread between August propane and January 2017 Mont Belvieu propane is 8.125 cents. But note that the spread between August propane and January 2017 Conway propane is at 12.5 cents. The spread between Mont Belvieu and Conway in August is 7 cents, but in January it is only 2.625 cents.

Traders are telling us that the market for Conway propane has become very illiquid, especially starting in the first quarter of 2017. That means there aren’t many interested sellers. In fact, some traders told us not to be surprised if we had to pay even more than posted in our curve above to get a deal done for first-quarter Conway.

There are a limited number of sellers of Conway propane on its best day. Just a few sellers becoming less aggressive can have a profound effect on market liquidity. Obviously sellers are seeing the currently high inventory conditions as temporary. They are playing the gambit that supply and demand conditions will be more in their favor by the end of winter.

While they may be right, current market conditions present quite the conundrum for propane retailers who are champing at the bit to buy for winter. But with the market already pricing an 8- to 13-cent gain by January, taking a winter supply position is not without some risk.

As always, if a retailer is taking a supply position and then quickly making sales against that position, it is a true hedge with no risk to the retailer. Remember prices are still quite good from a consumer perspective, even at the higher winter prices.

However, taking a supply position without a plan to sell against it soon is pure speculation. If a retailer is speculating, he or she needs to take into consideration how much increase in price the market is already putting on the future months.

Chart: LP Gas Magazine

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