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Trader's Corner
This week’s Trader’s Corner is looking at petrochemical demand for propane.
U.S. propane inventory has stopped building over the last four weeks, causing concern that supplies could be short during the winter season. Those concerns have driven propane prices to new highs for the year.
According to current independent estimates, the United States is exporting about 9.3 million barrels of propane per month. That propane is going mostly to destinations in Latin America, but some is going to as far away as Japan. Currently a producer can load propane on a ship, pay 33 cents per gallon shipping to Japan and still make 10 cents more than selling it into the U.S. market. The gain would be closer to 20 cents for cargoes going to Europe.
With new export capacity coming on line in September, the United States could be exporting 11 to 13 million barrels per month by October, some estimates show. That would make the United States the largest propane exporter in the world.
But exports are not fully accountable for the sudden lack of U.S. propane inventory builds. In fact, more barrels are being consumed by the U.S. petrochemical industry.
June data on petrochemical consumption shows a sharp jump in propane use over April and May (click the chart above to enlarge). In June, petrochemicals were consuming propane at a clip of 514,000 barrels per day. That is in excess of 15 million barrels per month.
Combined exports and petrochemicals are accounting for well more than half of U.S. propane production of around 42 million barrels per month. With imports also lagging, domestic demand beyond petrochemicals has been enough to limit propane inventory builds to a mere trickle. The Gulf Coast and Midwest have experienced rare summertime inventory draws recently.
Just like there is no reason to expect propane exports to back off, there is also little reason to think petrochemicals will not continue consuming propane at higher rates. Their capacity utilization has increased from around 84 percent in April to 94 percent in June. Plus petrochemicals are steadily increasing U.S. processing capacity.
Even though propane inventory remains at normal levels for this point in the year, the recent trend of no builds at a time that normally sees builds in excess of a million barrels per week is alarming. Those alarms have rang distinctly in the ears of propane retailers, forcing many into taking supply positions they would have just as soon avoided. Propane prices have gone up more than 40 percent in the last two months, making buying at the current price hard to swallow. Most retailers are agonizing having not captured supply when propane was trading in the 80s.
Despite the gains, the threat of higher prices remains real. Forecasts for a good crop-drying year and heating-demand season, coupled with the rising exports and petrochemical demand, points to a bullish pricing environment.
For now, it looks as if higher prices that may back off exports and petrochemical consumption are about all that will take the strain off inventories. Propane prices could also be impacted by a dramatic fall in crude, but that seems unlikely with all of the turmoil in the Middle East.
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
The lack of inventory builds continued to push propane prices higher. Crude was volatile on the week, with the latest on Syria being the key driver. As always, crude provided some influence on propane prices, but propane’s own fundamentals remained the key to price movement. We remain bullish for this week.
LAST WEEK'S DAILY HIGHLIGHTS
Monday: U.S. durable goods orders did not meet expectations, putting downward pressure on crude prices. Propane carried some of Friday’s upward momentum into the early-morning trade, but that quickly faded, with both hubs posting losses of around 1 percent.
Tuesday: The possibility that the United States and its allies would conduct airstrikes against facilities controlled by the Syrian government, in retaliation for Syria using chemical weapons against forces opposing the rule of Syrian President Bashar al-Assad, sent crude up sharply. Propane rebounded, with Belvieu recovering Monday’s loss and Conway showing even more strength.
Wednesday: For the third week in a row, the U.S. Energy Information Administration reported that U.S. propane inventory remained essentially unchanged. The report sent propane up quickly, with both hubs gaining more than 3 percent. Middle East crude supply disruptions and threats had crude gaining as well.
Thursday: Word that any attack by the United States and its allies would likely be delayed as countries try to gain political backing had traders taking profits on crude’s recent gains. Propane resisted the fall in crude, showing it is getting most of its price direction from its own fundamentals, which have been supportive of higher prices.
Friday: Markets were reacting to word that the British House of Commons had rejected a request by Prime Minister David Cameron to be involved in a strike against Syria. The news sent crude lower as the presumed retaliation strike appeared less eminent. |
