Crude drilling slowdown could support propane prices

Last week, U.S. crude production hit 11 million barrels per day for the first time ever. Active drilling programs and technological advancements have helped push U.S. production to this record high.

This summer, though, drilling activity has plateaued. There was a similar decline in activity last summer, so this slowdown may not mean a total change in strategy for producers.

Image Courtesy of CMS

However, it does appear producers are more interested in profit, taking care of investors and paying down debt. In the past, it was all about increasing the production number.

There are thousands of wells that have been drilled, but not completed, so the lack of drilling has not yet shown up in production. Wells in shale formation deplete rapidly, making steady drilling necessary to maintain – much less grow – production.

There are several factors that could be causing the slowdown of drilling activity. Possibly the most impactful factor is that pipelines taking crude away from some production areas are at or near full capacity, which limits the growth in production. The fastest-growing production area in the Permian Basin is dealing with such logistical issues. New pipelines to alleviate the problem will not be available until next year. We also are hearing reports about the lack of available workers to man drilling rigs and provide other well-completion services.

As we discussed in last week’s Trader’s Corner, the rise in propane prices this year has been related to the rise in crude prices. Only this week has Mont Belvieu propane’s value relative to West Texas Intermediate crude risen to near last year’s relative value. That is an indication that traders have not seen a lot in propane fundamentals to raise propane’s value. Of course, Conway values remain well below last year, as propane is oversupplied in the Midwest.

If crude is the driver of propane prices, then the slowdown in U.S. crude drilling activity is an important consideration in predicting the potential direction of U.S. propane prices. Gains in U.S. production have helped limit the upside for crude. In recent weeks, the increase in U.S. crude production has already slowed. If drilling activity remains flat for an extended period of time, that trend could continue for a longer term.

Should growth in U.S. crude production not be available to help offset losses in production elsewhere, crude prices will almost certainly rise. If they rise, propane prices are very likely to tag along.

Propane retailers should watch very closely what happens with U.S. drilling activity this fall. Last year, drilling activity picked up in the fall after the summer lull. If it does not repeat that pattern this year, look for that to be mentioned as a support for higher crude prices.

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