COVID-19 adds to propane supply and price uncertainty

Soon after crude oil prices plummeted into negative territory on April 20, I contacted Mark Rachal of Cost Management Solutions (CMS) to get the lowdown on the unprecedented low-price situation.

“When it went negative, it’s one of those deals where you take your glasses off and clean them because you’re just not sure that you believe what you’re seeing,” says Rachal, director of research and publications at CMS, which helps propane retailers navigate the propane pricing and supply environment.

COVID-19’s grounding of the once-roaring American economy contributed in part to West Texas Intermediate’s May futures trading on the New York Mercantile Exchange at negative prices before closing at negative $37.63 per barrel. The activity on April 20-21 marked the first time crude traded in negative dollars per barrel since trading began in 1983, according to the U.S. Energy Information Administration (EIA).

Travel restrictions and the closing of nonessential businesses have led to the falloff in demand for petroleum products. At the same time, crude oil inventories at the primary storage hub in Cushing, Oklahoma, were rising near capacity.

“You’ve had too much production for the amount of refinery throughput,” Rachal says. “So, you begin to fill up your storage locations.”

Rachal offers another component to the negative-price environment – the role of noncommercial (speculative) players in the crude oil business who struggled to find buyers for their contracts.

In the playlist below, Rachal discusses the propane pricing and supply environment, as well as the upcoming winter. Click the icon in the upper right corner to select a video.

More importantly, we’ve wondered what impact COVID-19 and the crude oil market will have on the propane industry.

“COVID-19 will have a greater impact on propane supply than it will on propane demand,” Rachal says.

Even before COVID-19 became a force in the market, Rachal began to notice some erosion in the growth of propane supply, primarily due to economically driven erosion in the drilling of crude wells in the nation’s shale plays. But he also says other supply factors are at work.

“It’s going to be a lot harder to get propane out of Canada,” he says, noting a natural gas production decrease and new export options north of the border.

In addition, Rachal isn’t convinced the economy will have recovered by the start of winter or that refiners will have returned to full throughput. That means those relying on refineries – from where about 15 percent of propane industry supply derives – may find less supply available to them, he says.

“If you can’t get the rail cars from Canada and you’re getting less supply from the refineries, it’s going to push more people to the pipelines,” Rachal says. “We already know the pipelines have struggled even in mild winters recently.”

Prior to COVID-19, Rachal was projecting an 8-million-barrel increase in propane inventory for 2020 – less than half of the growth seen in the previous year. If you consider the overall impacts from the pandemic, less production, continued exports and possibly more retail demand due to stay-at-home orders, Rachal’s projections go from an 8-million-barrel build in propane inventory to an 18-million-barrel draw.

“A propane retailer right now needs to be prepared for the possibility of tightness in supply,” he says, also noting how fundamentals are pointing to an upward swing in prices.

Stay ahead of the game throughout the year, Rachal advises, and watch the fundamental pieces of supply and demand because we’re navigating through an unknown situation.

Please welcome …

LP Gas welcomed two new members to the team early this year. Carly McFadden came on board as our new associate editor, and Sarah Peecher stepped into the role of digital media content producer. Sarah will author our monthly Digital Space column. Please welcome Carly and Sarah.