Low inventory relative to demand places upward pressure on prices

February 2, 2021 By    

Propane prices made a downward correction after the Martin Luther King Jr. Day holiday, but prices are increasing again. Mont Belvieu propane was in a downward correction for only three days, dropping 11.75 cents or 12.21 percent of its value. Conway’s correction was more protracted, lasting seven days and yielding a 24-cent, or 22.75 percent, correction.

Chart: Cost Management Solutions

Chart: Cost Management Solutions

It appears Conway overcorrected as it fell well below the 5-cent discount needed to cover transportation costs out of the Midwest to the coasts. Conway was closing the gap with Mont Belvieu (MB) LST to close out the week, with the spread just 6 cents at the close.

A testament to propane’s strength is the vast improvement in its relative value to West Texas Intermediate (WTI) crude. MB LST is now at 75 percent of WTI. Before the surge in U.S. propane supply, we tracked what we called the 70 percent rule. When the U.S. was a net importer of propane, petrochemicals were a major source of demand. They would tend to buy propane as a feedstock when its value dropped below 70 percent of WTI crude and back off of it when the price rose above that mark. Their action tended to keep propane valued at around 70 percent of WTI except during times of high heating demand, which would push propane beyond the 70 percent mark even as petrochemical companies backed off buying propane.

Chart: Cost Management Solutions _ propane inventory

Chart: Cost Management Solutions

The 70 percent rule went by the wayside during the massive oversupply condition that has persisted over much of the last decade, so it is notable when we see relative value above 70 percent even when winter demand is not exceptionally high.

At this time last year, MB LST propane was valued at 31 percent of WTI, less than half of where it is valued today. The five-year average for this time of year is 49 percent. MB LST propane is setting five-year highs relative to WTI for this time of year.

When propane’s value is rising against crude, it means its fundamentals are more supportive of prices. That generally means demand is increasing relative to supply. There are many metrics to anticipate relative value. We track most of those in our daily report.

One metric that has become popular in recent years to monitor supply and demand is days of available supply. Days of supply measures available inventory to demand. The U.S. Energy Information Administration only considers domestic demand when calculating days of supply. Many industry analysts use total demand, combining domestic demand with export demand. Days-of-supply calculations assume all production is stopped, leaving only available inventory to meet demand.

Chart: Cost Management Solutions _ days of supply

Chart: Cost Management Solutions

Above is a chart of total U.S. propane inventory. Comparing current inventory with last year and the five-year average, one can assume a tighter fundamental condition. Still, it’s a little hard to put that inventory level into context with only inventory data at your disposal. On Jan. 22, U.S. inventory was at 57.610 million barrels. That seems like a lot of inventory, but is it?

The days-of-supply metric provides some context to the inventory position. In this look, we are using total demand by combining domestic and export demand.

Winter export demand has averaged just 137,000 barrels per day less than domestic demand. Exports are running at 90.6 percent of domestic demand, obviously having a huge impact on the supply demand balance. That is why most industry analysts include exports in the days-of-supply calculation.

Demand is also volatile week to week, so it is common practice to use a four-week average of domestic and export demand when calculating days of supply. Our data follows that practice. Days of supply is at 19 currently. The lowest it has been over the past five years has been 14 days and the highest 67 days.

With this comparison, it is much easier to determine the adequacy of inventory.

Could we ever be in a situation where there would be no propane in 14 or 19 days? For that to occur, there would have to be no propane production or imports. On the unlikely chance of such an occurrence, propane prices would be in the stratosphere immediately, which would greatly reduce, if not halt, both domestic and export demand.

Nonetheless, by viewing inventory relative to demand, a clearer picture of propane fundamentals is revealed. The current days-of-supply trend informs market participants that either demand needs to slow or inventory/supply needs to increase.

Higher prices can accomplish one or both. As long as days of supply are trending lower, prices are certainly going to feel upward pressure. Days of supply increased from 18 to 19 last week. Should an uptrend in days of supply develop, current upward pressure on propane prices should be relieved.

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 info@propanecost.com.

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