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Propane inventories are well positioned for winter

October 25, 2022 By    

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, evaluates propane inventory levels as we approach winter.

Catch up on last week’s Trader’s Corner here: One curve to watch: Propane’s relative valuation to crude

Chart 1: Cost Management Solutions

Chart 1: Cost Management Solutions

A remarkable turn over the past 10 weeks has placed propane inventory in a great position for this coming winter.

Over the past couple of months, propane inventory has gone from near its five-year low to above its five-year average. Ten weeks ago, inventory levels were almost equal to where they had been last year, and if we looked at what inventory did from that point last year, it was very concerning. Fortunately, inventory builds this year did not follow the same path.

A key reason for the difference has been record high propane production.

One reason inventories struggled to build in the fall of 2021 was the impacts of hurricanes. Fortunately, we didn’t have those negative impacts on propane supply this year, which is part of the reason the inventory build has been so much better. However, rising natural gas production and increased refinery throughput have caused U.S. domestic propane production to move into and stay in record territory.

U.S. propane production had peaked at 2.464 million barrels per day (bpd) in 2020. Four weeks ago, that peak was finally broken with a production rate of 2.515 million bpd. Production dipped for a couple of weeks but set another record high at 2.560 million bpd last week. For the year, propane production has averaged 131,000 bpd more than in 2021. But during the 10-week period that inventory levels have separated significantly from last year, production has been about 140,000 bpd higher.

Chart 2: Cost Management Solutions

Chart 2: Cost Management Solutions

In the meantime, U.S. domestic demand for propane has dropped off this year. To this point in the year, it is down 79,000 bpd from the same period last year. We must admit we have been concerned that the lower demand was at least partly caused by consumers putting off filling tanks for winter because of high prices in general hitting household budgets.

It’s choppy, but look at the weekly domestic demand for 2022 in Chart 3. It’s the red line with the square markers. Focus on the last plot point, which was for the week ending Oct. 14 – the last data provided by the Energy Information Administration. The demand was a record high for the 41st week of the year. Could it be the first real cold front of the year forced those who had delayed filling tanks to finally act? You can tell by the choppiness of the weekly line that you can’t rely on just one week’s data to tell you much, but it nonetheless does give credence to the pent-up demand theory.

Chart 3: Cost Management Solutions

Chart 3: Cost Management Solutions

Regardless, propane production and inventory were well positioned to handle the increased demand. In fact, propane inventory went up 481,000 barrels last week despite the 591,000-bpd increase in domestic demand. A 432,000-bpd drop in export demand certainly helped. Exports have been strong this year, but a year-over-year increase of 116,000 bpd has not been enough to offset the gain in production, much less that gain coupled with the decline in domestic demand. This explains the remarkably good builds in propane inventory this year.

All this good fortune with propane fundamentals has been fantastic for the value of propane. Its relative value to WTI crude, normally at 60 percent this time of year, is closer to 40 percent. Propane’s price at Mont Belvieu as we write is at 83.375 cents compared to 143 cents on the same date last year. That is a 60-cent decline at a time when pretty much every other energy source is higher. Heating oil was at $2.60 this time last year and is currently trading at $3.76 per gallon. That is the equivalent of $2.48 per gallon propane.

Fundamentally, things are quite good for propane, and that takes the pressure off needing to get any type of price protection for this winter. But we are going to unapologetically pound the table about looking at the value proposition that can be offered to propane consumers because of the good fortune that has come our way. These kinds of opportunities tend to slip away as fast as they appeared. Let’s hope we are not looking back in a couple of months wishing we had done more to capture it for our customers. We can only imagine how much a heating oil marketer would love to be able to offer the value that a propane dealer can offer at this point.

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