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Trader's Corner
This week’s Trader’s Corner focuses on propane exports and their impact on pricing.
If you are searching for the reason propane prices have been moving up, it won’t take long to find your answer. Right now it is all about export activity.
In the chart above (click to enlarge), the red bars are this year’s propane exports. The yellow bars are 2012; the gray area is the five-year high-low range; and the brown bars are the weekly estimates on export volumes by the U.S. Energy Information Administration (EIA).
The chart clearly shows the impact of the new Enterprise export facility that came on line during March, adding about 4.5 million barrels per month of capacity. Exports averaged 5.167 million barrels per month during January and February. The rate increased to 9.542 million barrels in May, higher by 4.374 million barrels per month over the January/February average.
Unfortunately the official monthly export data lags by about two months and the weekly estimates by the EIA have not been an accurate predictor of the official monthly volumes. However, the weekly data does provide value in perhaps predicting the trend. The weekly data at least suggests that exports were even higher in June and July.
A propane retailer hoping the new export facilities would not inflate the price of propane too much can take solace in the fact that U.S. propane inventory is still 7.1 percent above the five-year average, even after five months at this higher export rate.
Unfortunately for one hanging to that fact, another export facility is coming on line in September. Targa will open a facility that looks set up to export around 2.16 to 3.24 million barrels per month, with the lower number the most likely.
Given that the Enterprise facility appears to be near capacity, if not fully subscribed, more export demand could be on the horizon. Those red bars have a good chance of taking another step higher before the end of the year.
During our hedging workshop this past week, a trader from a highly respected company spoke to attendees. He said, in the supply/demand race, propane supply is the tortoise and demand the hare. U.S. propane production is steadily increasing, but demand darts ahead with completion of export facilities and petrochemical needs.
Because gains in supply and demand are not smooth, the “tortoise/hare” effect is to create a lot of volatility in propane prices.
In our March 28 issue of Trader’s Corner, we discussed the changes in the supply/demand picture. In that discussion, we talked about propane’s relative value to crude. We pointed out that propane, before all of the new supplies from gas plants started coming on line, would trade on average around 70 to 75 percent of crude. As supply outstripped demand, propane at both hubs fell to around 30 to 35 percent of crude.
In our March 28 report, we suggested that, based on global propane prices, it would not be inconceivable for new export capacity to return propane to between 45 and 55 percent of crude. For much of the summer, that prediction seemed to be a significant overshoot as propane stayed in a 30-something relationship to crude.
But with the recent run in propane, Belvieu traded to 41 percent and Conway 40 percent of West Texas Intermediate. Suddenly the 45 to 55 percent suggestion once again seems plausible. That is especially true given the new export capacity will be coming on line just as crop drying and winter demand start kicking into gear.
Until propane traders are convinced that the tortoise is keeping up with the hare, propane sellers may be in the driver’s seat heading into the fall. Propane sellers are certainly eager to drive prices toward the 45 to 55 percent value relationship to crude.
If their drive is successful, keep in mind that at $105 crude, propane would be valued at 137.5 cents at a 55 percent relationship. It is a drive propane retailers would prefer not to take, but perhaps should be prepared for the possible journey just the same.
Correction: In last week’s report, a reference to crude’s closing price on July 19 was incorrect. Crude closed at $108.05 that day, not $118.05.
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
Crude drifted lower for most of the week as traders worried about the Fed ending its economic stimulus measures, a slowdown in Chinese economic activity, a softening of gasoline prices and comments by Iran’s new president about resolving issues with his country’s nuclear work. But prices rallied on Friday as Chinese industrial and import/export data was better than expected.
Propane had a strong week, with the EIA reporting a light build in inventory that included a draw in Midwest inventory.
We went bullish last week and remained there to start this week.
LAST WEEK'S DAILY HIGHLIGHTS
Monday: Propane and crude were relatively quiet to start the week, with Belvieu dropping 0.4 percent, Conway gaining 0.8 percent and Crude dropping 0.4 percent.
Tuesday: Propane resisted a sharp fall in crude to stay near Monday’s close. It turned out to be a fairly bearish day for crude from a technical trading perspective.
Wednesday: Big day for propane as Conway jumped 5.625 cents and Belvieu moved up 3.625 cents. Propane was disconnected from crude, which posted a drop of $0.93. Momentum for propane came from a lower-than-normal inventory build reported by the EIA.
Thursday: Despite crude moving down again, both hubs stayed relatively stable. Conway dropped 1/2 cent and Belvieu traded lower in the middle of the day but ended up at Wednesday’s close.
Friday: Large gains in crude and propane were motivated by supply disruptions in the Middle East and positive economic news out of China.
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