Retailers should prepare for lower propane imports

April 13, 2021 By    

For many years, propane imports from Canada have been a key cog in the U.S. propane supply wheel. Prior to March 2017, all Canadian propane exports were destined for the U.S. When U.S. domestic propane supply began to burgeon during the shale boom, Canadian producers were forced to take less and less to move their propane into the U.S. market. For that reason, they began looking for alternative markets.

Chart: Cost Management Solutions

Chart: Cost Management Solutions

In March 2017, the first exports to Mexico began by train, and the volumes steadily grew with each month. Then, in May 2019, a new waterborne export facility began shipping propane to Asia. This past year was supposed to have been a boon for Canadian waterborne exports, but the pandemic had Asian buyers canceling cargoes. But, instead of forcing the barrels into the U.S. market, Canadian producers stored as much of it as they could, expecting that even with additional storage costs, they could still get a better return in Asia when the demand returned than from the U.S. market.

The chart shows total Canadian exports to the U.S. For most of 2020, they were setting new five-year lows. Even in the winter months of 2020, they stayed at or below the five-year average. With high inventory and improved values in the U.S. earlier this year, the volume improved. The latest official data from Canada is for January, which showed volume to the U.S. above the five-year average.

Based on U.S. estimates, we would expect volumes to have been around the five-year average in February and March. U.S. data shows that through the first 14 weeks of this year, propane imports from Canada are up 31,000 barrels per day (bpd), or 22 percent.

Chart: Cost Management Solutions

Chart: Cost Management Solutions

Increased imports helped improve the U.S. propane inventory position. In the eighth week of 2021, U.S. propane inventory had dropped to 24.641 million barrels below the same week in 2019. The deficit was cut 18.155 million barrels by the week ending March 19 but rose again to a deficit of 19.887 million barrels the next week and was at 19.455 million barrels the week ending April 2.

At the same time, exports from Canada to non-U.S. destinations recovered from the slowdown caused by the pandemic.

Again, the latest official data shows January volumes easily setting a new four-year high for the first month of the year and well off the lows of October 2020. There is little reason to expect those volumes won’t increase, with netbacks to producers from non-U.S. markets better than those from the U.S. market.

In addition, waterborne export capacity in Canada is about to increase again. Industry sources reported at the beginning of last week that another 25,000 bpd of capacity could be online by the end of this month. Pembina Pipeline’s Prince Rupert terminal on Watson Island in British Columbia is said to be preparing to load its first cargo. The new capacity will join the AltaGas/Royal Vopek RIPET terminal in Prince Rupert with a capacity of 50,000 bpd and the AltaGas/Petrogas 35,000 bpd terminal in Ferndale, Washington.

Bill Rawlusyk, executive director of NGL at IHS Markit, said in a presentation at the OPIS NGL Summit that more capacity is being considered. In addition, Rawlusyk says a new propane dehydrogenation (PDH) plant by Inter Pipeline will add additional demand in 2022. This comes as Canadian propane production is expected to be flat over the next 18 months. He expects the new demand from exports and the PDH plant will greatly reduce rail shipments to the U.S. He also says that rail volumes that accounted for 64 percent of Canadian demand in 2018 will be down to 34 percent by 2022.

Chart: Cost Management Solutions

Chart: Cost Management Solutions

The Canadian waterborne export facilities have tremendous transportation advantage over the U.S. Gulf Coast for movements to Asia. Perhaps this will result in less U.S. propane exports and leave U.S. production for domestic use. However, at this point, it would appear the Canadian volumes will be incremental to overall North American propane exports. If so, U.S. domestic propane supplies could get tighter.

In any case, U.S. retailers that have been receiving propane by rail from Canada may find product harder to come by and may need to consider other sources going forward. We have already seen the end-of-winter increase in propane supplies from Canada to the U.S. slow over the past couple of weeks. With the new export facility opening, this trend could very well continue.

The big inventory build seen in Canada last year is being depleted quickly. There is little reason to believe that trend will not continue as well.

This past winter showed what can happen to propane prices in the Midwest with good winter demand. Propane brought in by rail from Canada has become a big part of the U.S. Midwest supply. Midwest retailers should try to develop other rail sources in light of these developments.

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