Summer stocks filling the bill, winter’s price a roll of the dice

The costs of crude oil and natural gas bear watching, as does the weather picture and the infamous bottleneck-producing infrastructure issues. Not to mention the impact of world affairs on petroleum production.

The consensus in August was that propane’s price is unlikely to go down any time soon and retailers are advised to order enough propane to handle all the advance-purchases made by their customers.

“If you’re selling pre-buy gas, cover it; lock in your margin,” says D.D. Alexander, president of Global Gas Inc. in Englewood, Colo., a wholesaler/retailer that serves a 21-state marketplace from Wyoming eastward to the Atlantic coastline.

Propane Stocks (Million Barrels)

“I don’t think this is the year to speculate. I don’t think you should speculate on something you’ve already sold. It’s Russian roulette right now. Who knows what’s going to happen with the price?”

John DeJean, regional managing director at Plains Marketing L.P., a distributor/wholesaler headquartered in Yankton, S.D., echoes Alexander’s advice.

“It’s a dangerous game to leave anything open,” he says. “If you sell it you should buy it because the volatility can eat you alive.”

Should you sell pre-buys well, yet fail to cover them, your bottom line will suffer.

Primary storage supplies heading into the winter heating season look good, with pro-jections of more than 70 million barrels.

“If the price goes up you’re hauling it to the country for free,” says DeJean. “The price is extremely high with crude at $65, but that’s not to say it can’t go higher.”

While a number of marketers are buying at a good clip, DeJean does see some who are holding back on their buys, causing some concern given the uncertainties involved.

“There are a lot of retailers running on the bottom of the tank,” adds Alexander. “There are a lot of dealers waiting for the price to come down, and they’re betting against the trend.”

Regional Propane Production (Million Barrels)

Propane’s price usually hovers around 70-75 percent of what crude oil sells for.

“Propane is trading at 59 percent of crude, and that’s the first time that’s happened in my lifetime,” says Alexander.

Seeking a cushion

An adequate industry-wide supply as winter approaches does not necessarily guarantee that there will be plenty of propane once the wicked weather kicks in.

Regional Propane Production (Million Barrels)

“We might not have as big a cushion as we think we do. There are a lot of tanks out in the field that aren’t filled,” says Alexander. “We wish we all had a crystal ball on the pricing, but we don’t.”

“The inventories right now are looking pretty good, but it doesn’t take long for inventories to go from looking good to showing stress,” adds Tancred Lidderdale, an economist with the Energy Information Administration.

“Our forecast is increasing propane prices into the winter. In 2004 the average annual retail propane price was $1.42 a gallon. It rose to $1.67 per gallon in 2005, and 2006 expects to see $1.79. Crude is likely to stay above $58 a barrel.”

Propane Demand (Million Barrels per Day)

Lidderdale adds that as the petroleum marketplace is analyzed, it turns out to be a pretty complex relationship.

“The price of crude oil has skyrocketed above natural gas and taken propane with it – but not necessarily in lockstep,” Lidderdale says, noting that natural gas typically serves as an anchor for the cost of propane. “The story may be in rising natural gas prices this winter rather than the price of crude oil. Focus more on natural gas than crude oil.”

“It goes on the price of natural gas as well as the price of crude oil. Rising natural gas prices will pull propane up. If the gas price increases enough they’ll leave the propane in the natural gas,” which could present propane supply issues as refiners adjust output to take advantage of market conditions.

Obviously, weather variables are a key element of any heating season, as last year’s weak winter put the squeeze on margins. It’s better, though, to have the propane on hand ahead of time, according to Michael Schwartje, vice president at ConocoPhillips.

“We want to make sure we have the wet barrels in the ground for all our pre-buys,” says Schwartje. “You can’t count on the forecast. We don’t change our business based on what the weather forecasts are. We want to be sure we have good supplies.”

CHS Inc. of St. Paul is starting early and layering in portions of the contract needs for winter, according to Andy Arendt, marketing manager for propane. The company is aggressively pushing its year-long contract sales, and spreading out the payments over 12 months can be an attractive option for customers with limited funds.

“Start marketing your budget plans and start filling their tanks in April,” Arendt advises.

“That sort of spreads out your cost over the whole year,” says consultant Ron Gist, senior principal with Purvin and Gertz.

Contracts can be a tough sell in lean economic times. Retailers, in return, are holding back right along with the end-users.

“Last year, people were topping off their tanks. This year’s incentive is even more,” says Gist. “It appears people are being conservative at buying what they consider to be a high-priced product – that darn crude has gone ballistic on us.”

Bourne’s Heating Fuels & Service in Vermont sells fuel oil along with propane; company president Peter Bourne says the expense of that commodity creates a favorable comparison to propane.

“We’re not seeing the backlash like we’ve seen on the oil side,” he observes. “On the oil side it’s made life much more stressful.”

Vermonters will stay warm this winter, he asserts, and the business aspect is in good shape.

“We’re locked in for what we need and we haven’t had to shrink our margins because of the higher pricing,” says Bourne.

Soothing the hullabaloo

In Mississippi, retailers are reporting “nothing but price problems,” according to Jerry Wilkerson, executive director of the Mississippi Propane Gas Association. Margins have been holding, but not as well as they’d like.

“They’re just out there making a living,” he says.

“There’s a frustration out there,” relates Steve Ahrens, executive director of the Missouri Propane Gas Association. Despite the pricing and margin complaints, however, business is going forward.

“The gamblers are gambling and the others are sticking to their step-buys,” says Ahrens.

It’s a sour situation in the Dairy State.

“The consumer has been holding on thinking that the price is going to go down, and it isn’t,” says Randy Knapp, executive director of the Wisconsin Propane Gas Association. “It’s a hullabaloo. If there has been a year that’s bad – this is the worst. They’re trying to get the consumer to fill their tank now and not wait until the fall.”

“Our dealers would love to see the prices come down,” says Tod A. Griffin, executive director of the Kentucky Propane Gas Association. “The ones I’ve talked to are trying to hold their margins.”

Electricity rates are quite low in the Bluegrass State, which increases the competition over propane’s perception as end-users ponder their purchasing options.

“Thank goodness that gasoline and natural gas are so high,” says Griffin. “Consumers think gas is gas, and crude oil is going through the roof.”

Or is it? Supplier Mike Tracey, vice president of marketing for SEA-3 terminals in Portsmouth, N.H., is not making any predictions this year. Yet he says the high price of crude is all hype, and he floats the possibility that crude could come down to $45 a barrel as market forces take hold.

As propane was selling for 95 cents wholesale in August, Tracey sees retailers holding back in favor of just-in-time inventory. “They’ve decided that they can’t afford to buy much,” he says.

Dealers are encouraged to back-up their pre-buys before the snow flies.

“Make your margin and go on,” Tracey urges. “Most of them have learned that over the years and they don’t take the risk.”

Tracey discourages this type of speculating, stating, “It wouldn’t be very prudent to do that right now.”

Should supplies get exceptionally tight, Tracey will buy more propane off the high seas, filling shortages with imports.

Weather and the performance of the infrastructure are the likely to be the key drivers of this winter’s heating season.

“It looks like we’ll have plenty of inventory,” says Tracey, “Only it may not be in the right place.”