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Trader's Corner

This week’s Trader’s Corner looks at the decrease in propane consumption by petrochemical companies.

Petrochemical companies are reducing the amount of propane they are consuming, which will leave more propane available for winter heating demand. The combination of increased propane exports and growth in petrochemical consumption has been a key reason propane supplies have not been overwhelmed by rising production.

The fact that propane has more places to go has allowed its price to increase over the past year. Belvieu propane is up 18.5 cents or 22.7 percent over where it was last year. Conway propane is up 24.75 cents or 31.5 percent this year. At the same time, West Texas Intermediate (WTI) crude has only increased $10.62 or 13 percent over the same period.

The fact that propane has outpaced WTI crude to the upside reflects a tighter supply-demand balance for propane because exports and petrochemical consumption have outstripped increasing propane production. Belvieu propane was trading at 43 percent of WTI this time last year and is now up to 48 percent. Conway has seen an even more dramatic increase from 39 percent to 46 percent. Propane producers have been aggressive in bypassing the Midwest to move their barrels directly to the Gulf Coast or East Coast, where better netbacks can be realized.

As much as propane prices have increased, it looked as if it would be much worse a couple of months ago when propane inventory builds flattened out. At the beginning of the year, we had said we thought propane would trade between 45 and 55 percent of crude this winter. A couple of months ago, we were saying the upper end of that range was looking more likely.

One reason prices have managed to stay in the lower end of the range thus far has been that petrochemicals have cut back on the amount of propane they are consuming over the last couple of months.

As we have mentioned often, petrochemicals have been rapidly increasing their U.S. processing capacity to take advantage of low-cost feedstock. For much of the year, new highs in petrochemical propane consumption were being set. In September, that was not the case.

They consumed 426,000 barrels per day (bpd) last month, down from 468,000 bpd in August. The consumption rate is well below the February high of 529,000 bpd.

The drop between July and August could be partly explained by a drop-off in overall petrochemical activity. Petrochemicals only used 89.8 percent of their overall capacity in August. However, 93 percent of capacity was used in September, back near the top of utilization rates. Yet, propane consumption fell.

The reason propane consumption did not rebound with increased capacity utilization is that petrochemical companies favored ethane.

The table shows ethane accounted for 60.5 percent of the total feedstock stream last month, up from 56.6 percent in August. A million barrels per day of ethane were consumed, up from 913,000 bpd the previous month.

There are many factors that go into the makeup of the petrochemical feedstock stream. But if one only considers price, it is easy to see why ethane is the preferred feedstock. Ethane traded at a daily average of 25.875 cents per gallon to Belvieu propane’s 116.125-cents-per-gallon average on Thursday.

Obviously it will benefit propane retailers and their customers if petrochemicals continue to favor ethane this winter, especially given that exports are likely to remain robust this winter and a potential surge in crop-drying demand is probable over the next few weeks.

For now, low ethane prices and falling crude prices are propane consumers’ best friends. Propane prices are up more than 12 cents since Sept. 25. It could be much worse if crude had not actually declined over that same period and petrochemicals had chewed up more propane during September.

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The upward momentum for propane has slowed as falling crude becomes a weight. But we will stay bullish for propane going into the week. The delayed U.S. Energy Information Administration (EIA) report due Monday could change the outlook, however.

Monday: Propane and crude moved higher – propane getting support from fundamentals and crude on hopes a deal to end the debt-ceiling crisis was at hand. Crude was limited by weak export data from China.

Tuesday: No resolution in the Washington budget crisis pushed crude lower, but propane continued higher. Positive reviews on the Iran nuclear talks helped soften crude prices as well.

Wednesday: There was no EIA data to affect markets, but Belvieu propane kept its steady March higher intact. Conway prices were higher but trailed Belvieu. Crude bounced on word the Senate had reached agreement on a bill that would reopen the government and extend the debt ceiling.

Thursday: A sharp drop in crude helped pull propane prices lower. With the U.S. budget crisis averted, at least temporarily, markets began to trade crude fundamentals, which were on the bearish side.

Friday: Crude prices made a recovery on good news concerning China’s gross domestic product. Propane was quick to join in the rally. Cooler weather and more crop-drying demand were likely pushing propane, though trading volume was fairly light to close the week.

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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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