Propane price spreads encourage exports

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, explains why the price spread between the U.S. market and foreign markets has expanded.

Catch up on last week’s Trader’s Corner here: Propane prices, valuation shifting

U.S. propane inventories took another dip lower for the week ending Oct. 9, as reported by the Energy Information Administration.

Inventories have been down in five of the past eight weeks. The build in inventories ended earlier than usual this year. They went sideways for a while, but it looks like a regular draw on inventories may have begun. If that is the case, it won’t take but a couple of weeks for all of last year’s large surplus to be gone.

As we pointed out last week, propane exports are robust.

Focusing on the four-week average line, we can see that exports started increasing about a month after the war between the United States and Iran began. For the most part, exports have been setting new highs each week since then.

The chart above shows how much higher the prices in the Far East and Europe are than Mont Belvieu ETR. Note how the spread surged just after the war began and before ship buyers could divert ships from the Middle East to the United States for supply. Obviously, that is a lot of incentive to head to the United States for supply.

Once the ships started showing up on U.S. shores and buyers were able to get supply from the United States, the spread started coming down. When the United States and Iran signed a ceasefire, the spread fell to below where it was before the war started.

But as the war has dragged on and as the world struggles to find enough supply, even with the increased volumes from the United States, the spread is once again expanding.

Foreign buyers are now competing with domestic buyers as the U.S. heating season gets underway. As U.S. propane export volumes show, buyers have little choice but to pay up to get the supplies they need. Even as U.S. propane prices have shifted higher (as we discussed last week), the price spread between the U.S. market and foreign markets has increased.

This spread increase is a sign that foreign buyers are willing to go toe-to-toe with U.S. domestic buyers for the supply that is available. If that remains the case, it is going to be hard for propane prices to retreat unless crude prices tumble for some reason.

The only reason for crude tumbling would be if threats to crude and other energy supplies in the Middle East are no longer present – in other words, if the war between the United States and Iran ends. It is hard to see that happening until we are at least deep into this winter.

Charts courtesy of Cost Management Solutions.

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