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Trader's Corner

This week’s Trader’s Corner catches up with data on U.S. propane and crude inventory.

This past week was unique, with two Weekly Status Reports from the U.S. Energy Information Administration (EIA) coming in the span of three days. Data that was collected on Oct. 11 and due for release on Oct. 16 was not released until Oct. 21 because of the Washington budget crisis that had people responsible for the reports furloughed.

That report was quickly followed by the Oct. 23 report, which was data collected through Oct. 18. Last week we looked at petrochemical demand for propane, but the two weeks prior the focus was on propane and then crude inventory. With so much new data coming last week, we wanted to get everyone caught up on how vital propane and crude inventories stand.

Let’s begin, though, with a look at how propane and crude prices have been trending recently. Click the chart below to enlarge.

As the chart shows, propane and crude prices were tracking each other fairly closely during the middle of September. In late September, propane values slipped against crude, but during October propane prices have been strong against West Texas Intermediate (WTI) crude.

The primary reason for the shift has been propane fundamentals have been more supportive than crude fundamentals. In reality, crude fundamentals have not been that supportive for a while. Crude is globally well supplied and is projected to remain that way through next year.

What primarily changed was that crude lost some of the geopolitical support it had from the potential for the United States to get more deeply involved in the civil war in Syria. Then more recently, there seems to be good progress in possibly resolving the Iran nuclear issues. If negotiations between the West and Iran continue to progress, as they seem to be doing early on, it is possible sanctions could be lifted and more Iranian crude will be making it to market next year.

With the geopolitical supports waning, crude traders have been left to look more closely at crude fundamentals to justify price. That look has not revealed much fundamental support, especially for U.S. crude and thus the reason WTI prices have been on a downtrend that started after reaching a high of $112.28 on Aug. 28.

In the early stages of the crude downtrend, propane appeared willing to follow crude lower, with propane inventory holding at above-average levels. But as the charts below will reveal, fundamentals became more supportive of propane, eventually resulting in the separation that has been occurring this month.

Over the last five weeks, U.S. crude inventory has been on a sharp rise. During the latest three-week period, new five-year highs have been set for crude inventory. As of the last EIA report, total U.S. crude inventory was 10.4 percent above the five-year average for week 42 of the year. Importantly in those overall numbers, vital inventory at Cushing, Okla., has built for the last two weeks. Inventory there had fallen from 49.652 million barrels at the first of July to 32.620 million barrels at the first of October.

Meanwhile, the inventory trend for propane has been more supportive.

Propane inventory that had managed to stay above average through September has now slipped to just a little below the five-year average. It certainly looks like crop drying is having an impact this year. Since crop drying looks like it is going to peak a little late this year, it could carry propane prices through the typical October-November lull.

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There was a little rally in propane and crude to close the week. Propane is supported fundamentally, but crude is not. We went neutral on Wednesday when propane could not respond bullishly to an inventory draw. The move by crude on Friday was not enough to move us off that neutral stance to start this week.

Monday: Crude prices fell after the EIA reported crude inventory had risen 4 million barrels for the week ending Oct. 11. Propane resisted the fall in crude, with crop drying helping support prices.

Tuesday: Falling crude continued to weigh on propane prices, keeping them little changed for the week despite some support from the EIA data on Monday. Crude continued to sell off on a lack of fundamental support.

Wednesday: The EIA released its second Weekly Petroleum Status Report for the week as it tried to get back on schedule after the government shutdown. Once again, the inventory numbers were bearish for crude and more bullish for propane. Propane once again resisted the fall in crude, but while Conway stayed even on the day Belvieu was slipping under the weight of crude.

Thursday: Good crop-drying demand kept Conway propane prices supported, even as Belvieu struggled to regain upward momentum. A fire at Citgo’s Lemont, Ill., refinery pushed gasoline up, which in turn pulled WTI crude to its first positive close for the week.

Friday: WTI crude pushed higher for the second day in a row as traders were beginning to see opportunity in buying the beaten-up U.S. benchmark crude. Propane moved higher without crude to hold it back.

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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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