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Trader's Corner

This week’s Trader’s Corner looks at U.S. propane inventory.

We are back to looking at the status of propane inventories, as how they trend this summer may be more important than ever to anticipating where propane inventory will be next winter.

Since January, propane inventory has been coming down at an above-average pace. It has been a combination of increased exports, high petrochemical consumption and continued strong heating demand.

As the chart above shows (click to enlarge), the inventory downtrend is quite steep. By this point last year, inventories had already started to build. If we carried the trend line of the last three weeks forward, inventory would be at the five-year average in about three weeks.

Of course, a big part of the trend has been higher heat load than this time last year. Heating degree-days have been gaining by leaps and bounds over last year in recent weeks.

Looking nationally, this year’s heating degree-days are still 166 below normal, but are 523 above last year through the end of March. The gain against last year and normal really accelerated during March. For example, for the week ending March 23, heating degree-days were 455 above last year, and for the week of March 30 (shown above – click to enlarge), the difference to last year was 523 days. At the end of February, this year was only 236 degree-days ahead of last year and was still 237 degree-days below normal. Obviously it has been a strong March.

It will not be until the additional heat load is out of the equation that we will really know how the balance between new propane supplies and demand is going to run during the traditional inventory build period. The assumption is that the move toward normal inventory levels will slow. However, many believe inventory will indeed be back to the five-year average sometime this summer.

As we have been saying in recent reports, there are a lot of changes going on in both the supply and demand for propane. It is hard to predict how it is actually going to go. At best, we just have to monitor and react to what transpires through the summer.

If propane inventory returns to normal, will propane prices return to normal – and what is normal today? Before the oversupply of propane began, it was normal for a barrel of propane to be priced at around 75 percent of a barrel of crude. That was a number of years back. That would put propane in the 160s. However, that looks a little steep compared to the world market. Below is a rough estimate of where propane prices are around the world.

• Northwest Europe 145¢
• China 160¢
• Japan 158¢
• Australia 144¢
• North Africa 159¢
• Middle East 151¢

If we look at the lower end of that price range, which we probably should since we are becoming such a strong exporter, propane would be valued at around 65 percent of crude. That happens to be where it was running before the more recent shale gas production overwhelmed infrastructure and demand.

Those kinds of valuations would be welcome news for propane producers, but not so welcome for retailers and consumers. Retailers and consumers must hope that all of the new U.S. production finding its way into the global market will pull down world values.

From a consumer perspective, one has to hope for a meet-in-the-middle situation, at worst. We must remember there are loading and transportation charges that will affect where Belvieu propane will actually have to price against the global market to find enough outlets to keep inventory under control.

A meet-in-the-middle scenario would put U.S. propane between 45 percent and 55 percent of crude. That would be around a dollar to $1.25 at the current price of WTI. With so many moving parts on the supply/demand front, we would not go so far as to call that a prediction for prices.

It is almost impossible to determine how the global propane supply and pricing will balance out. Producers around the world are duking it out as we write to determine the ultimate outcome. However, these references give us a logical framework from which to make supply decisions.

At this point, it is fairly safe to assume higher relative value than last year, but how much higher? If we assume the 45 percent to 50 percent range ($1 to $1.25 at current crude prices), making supply purchases accordingly, then we will have to monitor the inventory build this summer very closely.

Let’s say one is a “long-term” buyer who decides to buy 50 percent of next winter’s projected demand now. As this winter’s demand subsides, and if inventory begins to build at a normal to above-normal pace, he closes positions and reduces length in his supply. If the inventory build remains below normal, he steadily adds length as the summer progresses. So basically he begins in the middle and works in the direction that the market dictates.

Of course, there is always the case for playing propane on a short-term basis rather than trying to anticipate where next winter will trade. When one starts adding to the equation the possible changes to the global economic picture and how those changes could affect petrochemical demand and exports, it becomes difficult to make any assumptions about the future value of propane. Oh, and there is weather to consider as well.

Such unknowns make the strategy of playing the short-term ups and downs of the market (hoping to build a war chest of cash that we can use to react to next winter’s supply and retail pricing needs) all the more valid.

Either strategy can work. The key is to find the one that works best for you and then remain disciplined. In either case, you can’t take a position and forget about it. Each day when you come to the office, you must ask, “Are the assumptions I made when I took my current supply positions still correct?” If not, adjustments should be made to the supply position. There are plenty of tools available to allow you the flexibility needed to manage supply side risk in this way.

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

Crude fell as economic data suddenly began painting a dim view of the global economy. Data on U.S. jobs was particularly concerning.

Propane finally ended a six-day price correction with gains on Friday. Inventory data remains supportive.

We go into the week with a continued bearish short-term view, only because the rally in propane occurred on a Friday after such a long uninterrupted downward correction. We need to see at least one more up day before believing the correction is complete.

Monday: Disappointing global manufacturing data caused crude to fall. Propane continued the decline it began before the holiday as falling crude and milder weather forecasts weighed on trader sentiment.

Tuesday: Positive news on U.S. retail sales and factory orders helped crude overcome worries about building supplies due to crude pipeline issues and disappointing news on Eurozone factory orders. Propane remained under downward pressure as the strong buying of March continued to fade.

Wednesday: The Energy Information Administration data was bearish for crude but bullish for propane. U.S. propane inventory fell 1.11 million barrels in a week that inventory has averaged building 0.321 million barrels over the last five years. Nevertheless, propane prices could not overcome the building downward price momentum.

Thursday: Crude continued to fall as reports showed a weaker U.S. employment picture. Propane was lower but rallied off its lows to trim losses late in the day – suggesting prices were getting to a point of enticing buyers.

Friday: Propane continued the late momentum generated on Thursday to post the first gain after falling for six straight trading days. A bearish Labor Department report that showed the U.S. economy only creating 88,000 jobs in March sent crude lower.

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Cost Management Solutions LLC (CMS) is a firm dedicated to the analysis of the energy markets for the propane marketplace. Since we are not a supplier of propane, you can be assured our focus is to provide an unbiased analysis.

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