Export drop contributes to inventory gain
On Wednesday, the Energy Information Administration (EIA) reported a significant drop in U.S. propane exports for the week ending Aug. 9.
According to EIA weekly estimates, exports were 893,000 barrels per day (bpd), down 401,000 bpd from the 1.294-million-bpd export rate for the week ending Aug. 2. The significant drop put exports below the same week last year, which is rare. So far this year, exports have averaged 1.065 million bpd, up 210,000 bpd from the 855,000 bpd average during the same time frame last year.
The result of the export drop was a big jump in U.S. propane inventory.
Propane inventory increased by 3.206 million barrels to reach 86.509 million barrels. The gain exceeded industry expectations for a 2.3-million-barrel gain and the five-year average of a 2.257-million-barrel build during week 32 of the year. The large build put U.S. propane/propylene inventory 16.727 million barrels higher than last year.
One day after the build, propane prices at both Mont Belvieu LST and Conway posted 2019 low closes of 37 cents per gallon and 31 cents per gallon, respectively. To put those closes in perspective, Mont Belvieu LST hit a low of 30.125 cents and Conway 27 cents in 2016. Like this year, 2016 propane production had outpaced export capacity. Then export capacity caught up and prices went on an upswing for nearly three years.
The current price environment and last week’s above-average inventory build show just how dependent producers are on exports to keep propane supply and demand balanced. In last week’s Trader’s Corner, we showed the supply/demand balance for this year compared to last year. Gains in exports have actually kept up with gains in production. It has been lower domestic demand that has led to inventory increases and the ultra-low pricing environment.
There will be enough new export capacity coming online at the end of this quarter to balance supply and demand once more. If that capacity is used, inventory levels could come down, leading to upward pressure on prices.
If it were not for the U.S.-China trade war, we think utilization of the new capacity would be certain. But the scale and volume of geopolitical issues removes certainty from almost every conversation.
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