There has been a significant shift in propane’s fundamental condition over the last few years.
The table shows end-of-winter inventory positions and the year-over-year inventory changes since 2013, with 2017 numbers estimated based on current inventory levels.
The table reflects the fact that in 2014-15, propane production was far outstripping domestic demand and export capacity was not available to deal with the excess.
The result was that propane’s relative value to West Texas Intermediate (WTI) crude was driven down to 24.3 percent (the low point in the gray area of the chart). In other words, a barrel of propane was worth just a quarter of what a barrel of crude was worth.
As export capacity increased, propane’s relative value began to increase. As the first table shows, the higher export capacity led to an inventory decline of more than 13 million barrels in 2016. That decline caused propane’s relative value to crude to rise to 56 percent of WTI by the end of 2016. That was more than double the relative value at the end of the inventory-build period that occurred in 2014-15.
This year, the relative value to WTI crude has averaged 56 percent (exactly where it ended 2016) despite the fact that inventory is around 22 million barrels below where it was at this time in 2016.
Nonetheless, the market is starting to reflect the tighter fundamental picture for propane. The dip to around 45 percent of WTI was a bit of a surprise in February, but it reflected the bearish bias in the market because of a mild winter.
Since then, propane’s relative value has been on an uptrend. It doesn’t feel like it though, because crude’s value has been down this year. The last couple of weeks have really reflected the tighter fundamental conditions for propane. In the month of July, Mont Belvieu propane has gone from 56 percent to 60 percent of WTI crude.
The chart above shows that Conway’s relative value has been on an even steeper climb recently. The difference between the relative value this year compared to 2016 is quite stark.
Propane’s relative value to crude is reflecting the much tighter fundamental conditions for propane. We fear the weak fundamental conditions for crude that are keeping its prices low are causing a false sense of security in propane markets.
Unless propane inventory improves dramatically over the next 10 weeks, propane’s relative value is likely to increase. If WTI stays around the $45 mark, traders favor a potential increase in the price of propane.
Of course, more declines in crude prices would mitigate some of the potential increases in propane prices. The worst case at this point would be a surprise recovery in crude prices this fall and winter to go along with the supportive propane fundamentals.
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