Propane’s relative value to crude drops below expectations

Propane’s relative value to crude has been dropping recently, falling well below the five-year average. A combination of weakening propane fundamentals and a rally in crude are responsible.

Mont Belvieu propane is now at 41 percent of West Texas Intermediate (WTI) crude, well below the five-year average for this time of year.

Conway’s relative value is even worse at 35 percent, putting it just a percentage point above its five-year low. On average over the last five years, Mont Belvieu has been 48 percent and Conway 46 percent of WTI crude at this point in the year.

Frankly, back in April we did not foresee propane’s relative value dropping as far as it has over this summer. We expected a slowdown in the rate of growth in propane supply and a dramatic increase in propane export capacity to prevent the kind of lows we’re currently experiencing. However, propane exports have been more price sensitive or price elastic than we could have foreseen then.

Propane is a good value for a buyer – at least for August propane – at these relative values. Essentially, a Btu provided by propane is on sale. However, that sale right now is not as good for the winter months. For example, January 2017 Mont Belvieu is trading at 45 percent of WTI crude. Conway is trading at 44 percent of WTI crude, a whopping 9 percentage points over the August barrel.

Obviously, the market is pricing that propane fundamentals will improve, causing its relative price to crude to improve in the coming months.

Currently, inventories are very high in the Midwest. This is causing storage problems that are leading to beat-up Conway prices. But some traders say product that had been staying in the Midwest this year is set for export off the East Coast starting in 2017. That could quickly alleviate the stress in Midwest storage and elevate prices.

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