The price difference between the two major U.S. propane trading hubs has tightened considerably over the last month and a half.
The chart above shows how much Mont Belvieu is trading above Conway. Of course, it is possible for Conway to trade more than Mont Belvieu, but that has not happened in 2015 or 2016.
From the first half of the year, the spread between the two hubs was less than it was in 2015. But by August, Mont Belvieu was trading at a higher differential to Conway when compared to 2015. In August, Mont Belvieu was trading more than 8 cents higher than Conway. August was the peak of the spread, with the two hubs’ propane prices generally narrowing since.
It is not unusual for the spread to narrow closer to crop drying and winter demand, as those two factors have a greater impact on Conway than Mont Belvieu. The green five-year average line reflects that trend.
Since November, we have noted quite the divergence between what occurred in 2015 and 2016.
What is interesting is that crop drying and winter demand to this point in 2016 haven’t been that much different than last year. So, why is Mont Belvieu holding less of a premium over Conway than it did at this time last year?
For one thing, Midwest inventory is about 8 percent less than it was at this point in 2015, while Gulf Coast inventory is just 2.3 percent less. The winter weather, though milder to this point in the year than last year, has been colder recently.
However, those factors likely don’t tell the whole story. We think there could be influence from what producers are doing with propane production. First, Canadian producers are sending more production directly to Mexico and bypassing the Midwest/Conway. We also understand that more Midwest producers plan on pushing product east in 2017 for export rather than sending propane to Conway for storage. If that is correct, we could be seeing the market’s anticipation of that change in the tightening of the Conway and Mont Belvieu price spread.
Propane dealers, especially in the Midwest, may want to keep an eye on this trend. It could be a harbinger for relatively higher prices for Conway propane in 2017.
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