Propane supply growth begins to slow

November 4, 2019 By    

U.S. propane/propylene supply growth is slowing. Propane/propylene supply is setting new five-year highs with each passing week, but it appears to have peaked at 2.361 million barrels per day (bpd) during the week ending Aug. 2. Since then, production has been in a general decline.

Image: Cost Management Solutions
Click to enlarge. Image: Cost Management Solutions

For the week ending Oct. 25, production was 2.084 million bpd, down 277,000 bpd from the August peak. It appears that the decreased drilling activity for natural gas is finally translating to lower growth in propane supply. The slowdown in supply growth comes as new propane export capacity is coming on line.

We have yet to see an impact from the new capacity, but it is getting close to being fully available. This past week’s export rate was up 268,000 bpd, but that just took it to 1.222 million bpd, which is close to the maximum sustainable export rate before the expansion.

The new export capacity means that operable export rates over 1.3 million bpd should be attainable. Saudi Arabia raised its crude price for November, which should raise natural gas liquids values from there as well. That could drive more buyers to U.S. ports for supply just as domestic heating demand picks up. There have already been small declines in U.S. propane inventory.

Image: Cost Management Solutions
Click to enlarge. Image: Cost Management Solutions

If exports do indeed pick up and run closer to the new capacity, then there could be solid draws on inventory this month. Unless crude continues to fall and becomes too much of a drag for propane markets to ignore, there is a reasonable chance for more upward pressure on propane values.

Propane inventories remain high, but the shift in the supply growth trend and more export capacity could be flagging a change. Perhaps not a seismic change that is going to cause prices to surge. Instead, it is likely to be a slow trickle that sees propane values improve over a longer horizon.

If the trend continues, there could be more hedging activity from retailers as they try to get ahead of a rebound in propane’s value.

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