Propane’s relative value on the downswing

March 4, 2019 By    

Propane values continue to retreat against WTI crude, which reflects weaker fundamental conditions for propane.

Image: Cost Management Solutions

Image: Cost Management Solutions

The table above shows propane’s average annual relative value to WTI crude over the past 10 years, including its value so far in 2019. Propane’s value against WTI crude rises when propane fundamentals are strong and declines when fundamentals are weaker.

Prior to the shale gas revolution that dramatically increased U.S. natural gas production – and, thus, propane supply – propane averaged about 70 percent of the value of WTI crude. The table shows the erosion of propane’s relative value as propane supplies increased along with natural gas production.

Values were already declining prior to 2012, but, in that year, they took a major dive. Propane supply outpaced domestic demand, and there was an inadequate amount of export capacity to deal with the excess.

The industry began expanding propane export capacity, but the facilities took a while to build. In the meantime, propane inventory built as high as 106.2 million barrels in 2015. That year, Mont Belvieu hit a record low valuation against WTI crude at just 24 percent, and averaged 39.93 percent for the year.

The new export capacity finally began decreasing inventory after 2015, which improved propane’s relative value. The relative value rose to an annual average of 63.05 percent in 2017. The high inventory level that year was 82.183 million barrels, compared to 106.2 million in 2015.

In 2018, propane production growth outpaced propane export growth, which reversed the trend and increased inventory. The high inventory level in 2018 was 84.528 million barrels.

Though there was not much growth in propane inventory, there was enough to swing the pendulum for propane’s relative value in the other direction. Propane’s relative value to WTI crude averaged 56.81 percent last year, down 6.24 percentage points from 2017.

The pendulum is accelerating in 2019. Current U.S. inventory is 53.410 million barrels, which is 10.697 million barrels higher than this point last year. As a consequence, 2019 Mont Belvieu LST propane is averaging 53.20 percent of WTI crude. Keep in mind, the 2019 percentage reflects winter months when we would expect propane’s relative value to be its highest because fundamental conditions are tight.

Without a major shift in propane fundamentals, propane’s relative value could continue to deteriorate. Just this week, the U.S. Energy Information Administration reported U.S. natural gas production, which establishes growth in propane supplies, was at a record 98 billion cubic feet per day in the lower 48 states. It was the 11th month in a row natural gas production increased.

The growth in natural gas production likely means the growth in propane supply will continue. With U.S. domestic demand stagnant, exports must take up more of the excess in propane supply, or propane values will likely remain under pressure. There will be an expansion of export capacity in 2019, but it will not be until the end of the year.

Current conditions and trends suggest propane is trading at a lower relative value to crude this year compared to last year. It is a reasonable possibility propane’s relative value in 2019 will average between 50 and 52 percent.

Image: Cost Management Solutions

Image: Cost Management Solutions

Based on the latest crude price forecasts for 2019, for WTI to average $58.18 in 2019, a strong case could be made for Mont Belvieu LST propane prices to average 69 to 72 cents per gallon.

All of these projections are likely to change as new data and conditions emerge this year. However, the price range above could reasonably be considered as a starting point when planning. Prices in or below that range may be considered as initial entry points for price protection next winter.

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