Don’t be overly bearish about propane just yet

August 19, 2020 By    

Over the previous four Trader’s Corners, we used short-term benchmark prices on crude and propane to guide our discussions. Our short-term benchmarks began with Mont Belvieu LST at 50 cents per gallon and West Texas Intermediate (WTI) crude at $40 per barrel, which put the propane-to-crude price relationship at just over 50 percent. Last week, we changed our benchmark for WTI to $42 per barrel.

In the five trading days since making that change, WTI has averaged $41.94 per barrel, and we are feeling good about our change. WTI is also testing key technical resistance at its 200-day moving price average, having closed above that point over the last two days. Those were the first closes above that mark since January.

The 200-day price average is an important technical trading mark since many see it as the separation line between a bull and bear market. When crude is trading below its 200-day average, it would be in a bear market, and when it trades above its 200-day average, it is a bull market. There is usually a lot of technical resistance to move above or below that mark. As we write, WTI is trading above its 200-day average. Closes above the 200-day average have the potential to trigger more technical buying, which could move crude prices up to yet another level.

Technical traders are usually less concerned about basic fundamentals such as supply and demand. Instead, they focus on technical trading points, of which there are many to guide their actions in the market. Technical traders follow trends and patterns, and operate under the assumption that patterns tend to repeat themselves. They believe that where the current price is in relationship to key technical markers is a good reflection of the market’s total knowledge of things like fundamentals. That knowledge will cause price trends to develop.

Technical traders look for price trends and let those trends guide when they will enter and exit the market. They want to buy into upward price trends and sell when signals suggest the trend is about to change. At that point, they may short the commodity and ride the trend lower.

Over time, technical traders have learned the importance of breaks above or below certain technical points. That is what has occurred with the 200-day moving price average. As technical traders see closes above the 200-day average, their biases that prices will go higher will become stronger. If their confidence grows, then their “technical” buying can actually be a catalyst for another higher tick in prices.

Currently, the 200-day moving price average for WTI crude is at $42.12, which is right at our $42 benchmark. We will be watching the technical battle at the 200-day average closely. If we continue to see closes above it, we will be inclined to raise our WTI target price once again. It’s a little early to make a change; our $42 benchmark is serving us well. Though we tend to focus on fundamentals first in our analysis, technical trading plays a role as well. We are certainly at an inflection point where we are watching this key technical point very closely, and it will most certainly have some influence on whether we raise our WTI price target again.

There remain fundamental reasons for considering another bump up in the WTI benchmark price outlook as well. Despite the recent improvement in crude’s price, U.S. production companies once again hired fewer drilling rigs for the week ending Aug. 7 to drill crude wells for them. For that week, there were only 176 rigs in the entire U.S. drilling crude wells, down from 764 during the same week last year. The fact that the higher price did not trigger more drilling suggests that WTI has room to move higher.

Also, on Wednesday, the Energy Information Administration released the data it collected on Aug. 7. In that data, it surprisingly estimated that U.S. crude production fell 300,000 barrels per day (bpd) to 10.7 million bpd. U.S. production appeared to have bottomed out at 10.5 million bpd the week ending June 12. That was down from 13.1 million bpd prior to COVID-19. Production recovered to 11.1 million barrels by July 24 but has dropped 400,000 bpd over the past two weeks.

The drop in production, even as crude prices inch higher, raises concerns that there has been long-term structural damage to the U.S. oil industry. It also raises the question of whether the current amount of U.S. drilling activity is enough to offset regular well depletion. This is yet another reason to consider raising the crude benchmark again.

Overall fundamentals in propane have been more bearish over the last few weeks. Thus, we have not seen its price follow crude higher. It remains stuck around our 50-cents-per-gallon benchmark price. However, the developments above suggest we had best guard against getting too bearish on propane prices.

First, if higher crude prices do develop, it will cause a resistance to take propane prices lower, especially in the winter months. Second, the lower crude production, if it persists, will lower propane production, which could change the current trends in propane fundamentals from more bearish to more bullish.

The rapid recovery in propane production has been a bit surprising over the last few weeks. Propane production reached an all-time high of 2.464 million bpd for the week ending Jan. 3 but had dropped to 1.932 million bpd by the week ending May 1. The expectation was a very long recovery time in propane supply, but it is now just 141,000 bpd below its peak. That surprisingly rapid recovery has been a key reason propane inventories are now building at an above-average pace, putting a more bearish tint on propane markets.

The developments within crude production are a threat to the continued recovery in propane supply. If that threat is realized, it could develop into more fundamental support for propane prices. With the rapid recovery in propane production and some weakness and threats to propane exports, it’s justifiable to be bearish about propane. That is especially true given the low outlooks for crop drying and winter heating demand.

But be careful you do not write off the potential for a higher price scenario for propane prices too quickly. Watch the developments in crude production and pricing carefully and see how that translates to propane production and pricing leading up to winter. There may yet be a need to add more price protection ahead of this winter.

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

Comments are currently closed.