Downtrend favors propane buyers

May 13, 2024 By     0 Comments

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Trader’s Corner, a weekly partnership with Cost Management Solutions, analyzes propane supply and pricing trends. This week, Mark Rachal, director of research and publications, explains the current downtrend and why buyers might consider looking at the forward price curve.

Catch up on last week’s Trader’s Corner here: Does threat or opportunity win in your propane-buying plan?

On Feb. 16, Mont Belvieu ETR propane closed at 94.75 cents, and Conway had closed at 89 cents three days earlier. Those points marked the pinnacle of propane prices so far in 2024. Since then, propane has been in a downtrend.

Chart 1: Propane Closing Prices

Chart 1: Propane Closing Prices

The decline in prices has been a welcome development for propane buyers as propane prices have come down into a favorable buy zone. This improves the chance that price protection taken for this coming winter, and possibly beyond, will help lower the cost of propane for the customers of those buyers. It also could provide a chance for the buyer to improve their margin, which is needed given the mild winters of late.

The winter storm in January put a lot of upward pressure on propane’s price – not just because demand increased, but also because the storm disrupted propane supply.

In this Trader’s Corner, we’re going to look at propane forward price curves on the three dates circled in the closing price shown in Chart 1. But, before we do, let’s review what a forward price curve is and its benefit to propane buyers.

The price curve in Chart 1 simply plots propane’s closing price on each trading day. It was the price buyers and sellers agreed on as a fair value of propane on that specific day. It is also known as the spot price. Buyers and sellers are just as interested in determining the fair value of propane in the future. Just like negotiations are ongoing for prompt or spot propane and propane in the current month, negotiations are ongoing for propane in the further-out months.

A forward price curve captures the price that buyers and sellers agreed was the fair value of propane in the future or in the further-out months. These prices are commonly referred to as the out-month prices. Again, they are plotted on what is commonly known as the forward price curve. For our discussion, we are going to focus on the forward price curves for the Mont Belvieu ETR pricing point. The curves for other pricing points would have been similar.

Our first look in Chart 2 is a forward price curve on Feb. 16 when MB ETR propane was at its price pinnacle for this year.

Chart 2: Mont Belvieu ETR on Feb. 16

Chart 2: Mont Belvieu ETR on Feb. 16

Note how high the prices are for the out months on the front half of the curve compared to the out-month prices in the back half or further-out half of the curve. The perceived supply tightness from the winter storm was still greatly impacting prices. Because of the perceived tightness in the market, sellers weren’t willing to back off what they wanted for their propane through the winter of 2024-25. Anyone trying to buy for the winter of 2024-25 would have been paying a premium over the historical prices for those months.

However, the propane values for the winter of 2025-26 and the beginning of the winter of 2026-27 were quite good. Even with the front of the price curve blown out of proportion, there was still opportunity for buyers; they just had to look a little further down the curve.

After Feb. 16, propane production was back to normal, winter was getting milder by the day and propane was closing lower every day. Let’s look at the forward price curve at what would have been the bottom of the first leg of the downtrend that is still ongoing today. The first-leg bottom was March 12.

Chart 3: Mont Belvieu ETR on March 12

Chart 3: Mont Belvieu ETR on March 12

There had been a lot of movement in the front of the curve, but note how the prices for the winter of 2024-25 have hardly come down. The value is still there for the buyers for the winter of 2025-26 and 2026-27, but buyers for the winter of 2024-25 still would have been paying about what they would have been paying a month earlier.

This is a situation where the sharp movement in the very front of the curve (the prices that buyers are getting bombarded with every day) would have given the false sense that it was a good time to start looking at the upcoming winter. That would have been a wrong assumption.

Propane prices rallied from March 12 through April 5. This rally was greatly influenced by crude, and April 6 marks the beginning of the current downtrend in crude. At this point, propane production is back with a vengeance, and propane inventories are back near five-year highs. That left propane with little fundamental support, freeing it to fall with crude.

Let’s move on to the current forward price curve and see where buyers and sellers are coming to terms in the out months.

Chart 4: Current Mont Belvieu ETR

Chart 4: Current Mont Belvieu ETR

In Chart 4, don’t let the new blue lines throw you; we simply made the change to make it easier to differentiate between the summer and winter months.

Note how prices at the very front of the curve have come down significantly again. This time the prices for the winter of 2024-25 have come down another notch. Though the movement in the winter values may pale compared to the front months, it has been a significant few cents. Winter prices are now in line with where those winter months’ prices have averaged over the past 10 years. Perhaps more significantly, propane for this winter can now be hedged slightly lower than it could at this point last year.

Why is that so significant? In a world of high inflation, where the consumer is paying a lot more for almost everything with each passing month, propane buyers can probably lock down supply costs at a level that will allow them to offer their customers prices equal to what they paid this winter. A retailer doing that isn’t likely to get much pushback from customers and, in fact, is likely to score major goodwill points.

It is worth noting that, while still good, the propane values for the winters of 2025-26 and 2026-27 aren’t as good right now as they were when front spot propane was 94.75 cents on Feb. 16 at the price pinnacle. That brings us to a key takeaway from this analysis. We often let the spot market influence our decisions on whether to pursue price protection for the future. This analysis shows there can be a significant disconnect between the spot market and the very front of the forward price curve with the values that are being seen in the further-out months.

So, no matter the time of year or what is going on in the spot market, take the time to look at the forward price curve. You may find value there, and you may find prices that would work well for you in the future regardless of current pricing.

All charts courtesy of Cost Management Solutions

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