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Trader's Corner

This week’s Trader’s Corner looks at the latest in petrochemical activity.

As we look at the U.S. propane supply/demand picture, there are three major areas on the demand side to keep an eye. Of course, one is U.S. domestic consumption for residential and commercial use, which is generally the world of the propane retailer. The other two are exports and petrochemical consumption.

The new natural gas and natural gas liquids production has significantly changed the propane supply landscape in all of these areas. Propane is flowing in directions that would have been hard to conceive just a few years ago.

As imbalanced as the Northeast was from a supply/demand perspective, it’s difficult to believe there is now talk of developing a world-class export terminal from the Northeast to supply Europe. Not long ago, the big news was new import terminals along the Atlantic Coast.

The fact is all of the new production has overwhelmed U.S. residential and commercial demand. Unfortunately for us, that area of demand has not been growing much. That has opened the door for all of the new export action, which has been getting the lion’s share of the press for our industry. It seems everyone is getting into the export game.

An area that gets a lot less press is the activity of petrochemical companies. Again, what a change has taken place in the U.S. petrochemical industry in recent years. When natural gas prices surged to more than $13/MMBtu in the middle of 2008, many were calling for the end of the U.S. petrochemical industry.

Indeed, executives of petrochemical companies were quickly moving their operations to the Middle East and other areas in search of cheaper feedstock. But now there are press releases about every week of new petrochemical operations and new infrastructure to feed those facilities. It has truly been a 180-degree turn of events in less than five years.

The revitalization of the petrochemical industry is a testament to how quickly free markets can react to a change in the business climate. There is no doubt that new technology for producing natural gas, natural gas liquids and crude overwhelmed infrastructure and demand, but now the tide is turning.

The chart above (click to enlarge) shows petrochemical demand by year, with 2013 estimated based on consumption to this point. In 2008, when natural gas prices were so high, petrochemical demand was 115.157 million barrels. At the rate petrochemicals have consumed propane so far this year, consumption could surpass 182 million, which would be a 58.7 percent increase. The increase from 2008 through 2012 was 35.7 percent. When one considers the struggles of the U.S. economy during that time, it is a remarkable gain and speaks to just how much capacity has been added.

The above chart (click to enlarge) gives a good view of how much above the five-year average current consumption is running.

Okay, so we have a good feel for the big picture on petrochemical consumption of propane. There is little doubt petrochemicals have, are and will continue to have a major impact on the propane supply demand balance and thus propane pricing. So, let’s come down off that high-level view for just a second and see how petrochemical consumption has been running recently.

From the peak propane consumption of 529,000 barrels per day (bpd) during February, petrochemicals have eased off on propane consumption to 484,000 bpd during April. That doesn’t sound like much of a drop, but it amounts to 315,000 barrels more each week when the Energy Information Administration (EIA) reports inventory.

As you know from our previous Trader’s Corners, the trend has been toward a reduction of the propane inventory surplus. The inventory trend is definitely toward normal or even to below normal by winter. If petrochemicals keep reducing their rates, it will help the inventory picture and take some of the upward pressure off propane prices.

Of course, if they return to the February level of consumption or even increase that consumption, it will add pressure to inventory and thus be price supportive. We can’t lose track of the fact that propane is trading at relatively cheap valuations to crude. Because of that, once we get through the after-winter doldrums, inventory pressures could have inordinate effects on prices as we approach the fall and winter.

The inventory vigil continues.

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Crude defied fundamentals, economic data and a strong dollar to rally from midweek to get back to near where it closed the previous Friday.

Propane also rallied midweek after a supportive EIA report.

We go into the week neutral. There is a lot of daily volatility, but not a lot of net price movement over a week.

Monday: Chinese economic data, especially that showing a decrease in implied oil demand, pushed crude lower. A lack of demand seemed to put buyers in the driver’s seat on the propane side.

Tuesday: A report by the International Energy Agency projecting increases in non-OPEC production to outpace increases in global crude demand pushed crude lower. Propane moved lower, even with increased trading volume.

Wednesday: Propane prices moved higher after a supportive EIA inventory report that showed just a 0.800-million-barrel build in inventory, about half of the five-year average for the week reported. Crude fell sharply in the morning, but made a hard bounce off its 200-day moving price average to finish just above Tuesday’s close.

Thursday: It was a repeat performance for crude as it once again moved down in early trade, but rallied hard after touching a technical support point at its 50-day moving price average. Crude shook off concerning U.S. economic data on jobless claims and housing starts. Propane extended its rebound to a second day, as it seemed to tag along with crude.

Friday: Crude shrugged off a higher dollar and propane extended gains to close the week. Propane was higher from Wednesday through Friday after the EIA reported a below-average build in inventory.

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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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