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Trader's Corner
This week’s Trader’s Corner shows how a decline in refinery propane production is offsetting some of the increases in propane supply from natural gas processing.
In this week’s Trader’s Corner, we want to help you get a good overview on how U.S. propane production is running. We all know that the increase in natural gas processing has caused a sharp rise in the amount of propane production.
The increased production has caused a huge amount of change in what production areas supply certain demand areas. For example, Canadian propane producers are sending less propane to the Midwest and more directly to the higher-demand East Coast market.
Midwest and Rocky Mountain propane producers are moving more barrels directly to the Gulf Coast. We all know the Gulf Coast provides the most options for propane producers with the ability to export and supply a huge petrochemical industry that has been growing by leaps and bounds due to cheap feedstock costs.
Most of us also know that the Gulf Coast has the highest concentration of refineries in the U.S. Of course, refineries are a major source of propane as well. But as we will show today, the amount of propane coming from refineries is actually decreasing. This is opening the door for more gas plant production to move south.
First, let’s take a look at propane production from natural gas plants, since that represents all of the new production that is searching for a home. Click the charts to enlarge them.
Between 2005 and this year, U.S. propane produced at natural gas plants is up 264,000 barrels per day (bpd), a nearly 53 percent increase. This tremendous increase is a result of the development of new technology that allows the production of natural gas from shale formations.
This has completely changed the U.S. production landscape and the supply/demand balance around the country. We are seeing more propane produced near higher-consuming areas, but there has also been a glut in the Midwest, which has significantly altered traditional propane flows.
We will now focus on the refinery side, where we see an entirely different trend.
The chart above shows a slightly declining trend in total production from refineries, but that isn’t the real story. Refineries make propane and propylene. Petrochemicals covet propylene, and refineries are leaning toward producing more of it at the expense of fuel-grade propane.
The chart below breaks refinery production down into its propane and propylene components.
The chart allows us to see the transition by refineries from more fuel-use propane to more propylene production. Since 2005, fuel-use production has dropped by 46,000 bpd or nearly 15 percent.
The declines in fuel-use propane production from refineries of 46,000 bpd since 2005 do not nearly offset the 264,000-bpd increase in natural gas plant production over that time. However, it does show why more fuel-use propane has the ability to move from natural gas processing areas toward areas that have higher concentrations of refineries.
We would expect the trend by refineries to increase propylene production where possible, with growth in the U.S. petrochemical industry. Also globally there is more capacity being added to convert propane to propylene, since fuel-use propane production is exceeding demand, while the demand for propylene is growing.
Economics between propane and propylene are a bit difficult to pin down, as propylene trades in pounds and propane trades in gallons. Also, refinery-grade propylene is not pure and still requires processing once it comes out of the refinery. It may need to be moved to another location for the additional processing. A gallon of refinery-grade propylene/propane will weigh about 4.2 pounds and is probably going to contain somewhere between 2 and 3 pounds of propylene – the rest is propane. The current spot price of propylene is about .62 cents per pound.
That means a gallon of propylene/propane will gross $1.24 to $1.86 from the propylene. The remaining propane is valued at about .96 cents on a per-gallon basis. If a refiner were making propylene/propane that was near the high end of 70 percent propylene and 30 percent propane, he could get about $2.13 per gallon for his refinery-grade propylene.
Even with plenty of costs to consider, there is an opportunity for an upgrade in value by producing propylene over propane where logistics allow. This is an excellent example of how free markets respond to supply/demand imbalances.
Call Cost Management Solutions today at 888-441-3338 for more information about how Client Services can enhance your business, or drop us an email at info@propanecost.com.
WEEK IN REVIEW
Strong U.S. economic data and another large draw on crude inventories kept prices moving higher.
Propane got support from a bullish Energy Information Administration (EIA) inventory report to keep moving higher.
Crude is strongly overbought territory and is overdue for a correction. We will remain neutral in our outlook.
LAST WEEK'S DAILY HIGHLIGHTS
Monday: Data showing the Chinese economy cooling down limited the upside for crude. Nevertheless, upward momentum continued for both crude and propane as both finished higher.
Tuesday: It was a strong day for propane as both hubs gained despite a small pullback in crude. Propane traders appeared to get out ahead of Wednesday’s EIA inventory report.
Wednesday: Propane prices surged on another supportive EIA report. The inventory data for crude was also supportive, but builds in refined products inventory limited the gain for West Texas Intermediate crude.
Thursday: Propane and crude prices continued to rally following Wednesday’s bullish EIA report. Good data on U.S. jobless claims and mid-Atlantic manufacturing activity supported the buying of crude.
Friday: Markets saw profit taking to close out the week. Propane fell, but crude managed to eke out a 1-cent gain. |
