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Trader's Corner

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

In October, petrochemicals cut back on consumption of propane. It was the third month in a row that petrochemicals used less propane.

All of last year and until the last two months of this year, petrochemicals were setting new five-year high marks for propane use. Abundant supplies of relatively cheap LP gas for feedstock and cheap natural gas prices for plant fuel in the United States have caused rapid expansion by petrochemical companies.

The next chart will add capacity utilization to the propane consumption number.

The red line shows what percentage of total available processing capacity petrochemical companies are using. Between July and August, utilization dropped, so the amount of propane consumed also dropped. But in the last two months, capacity utilization has increased to where it was in July. However, the amount of propane being consumed has continued to fall.

Petrochemicals have backed off on the amount of propane they are consuming because its price has been rising. In July, Belvieu propane averaged 91.92 cents per gallon and traded at 37 percent of West Texas Intermediate (WTI) crude. In October, Belvieu averaged 113.32 cents and 46 percent of WTI crude. Propane’s relative value has continued to climb this month to 53 percent of WTI crude.

Petrochemical companies have cut back on increasing more expensive propane for cheaper ethane.

The table shows the percentage breakdown of particular feedstock in the overall petrochemical feedstock stream. Propane was 30.9 percent of the stream in July and 23.6 percent in October. In the meantime, ethane has gone from 55.9 percent to 62.8 percent of the stream.

Plentiful ethane averaged 24.8125 cents per gallon in July and, despite its higher use by petrochemicals, averaged only slightly higher in October at 25.75 cents. Even now, the increased demand is not pressuring ethane prices, with it averaging 24.1406 cents per gallon so far this month. Meanwhile, non-TET propane has averaged 117.3594 cents.

Obviously this is good news for propane retailers, given that exports were up to nearly 12 million barrels last month, according to industry sources.

At 389,000 barrels per day (bpd), petrochemicals used about 4.3 million barrels less propane during October than they did at the peak in February when they were consuming 529,000 bpd. That has offset a lot of growth in exports, which were at 5.142 million barrels in February, according to official U.S. Energy Information Administration (EIA) data.

With strong crop drying underway, propane inventory fell by 2.729 million barrels last week. Inventory that had been holding up fairly well is now 5.5 percent below the five-year average and 15.7 percent behind last year. That is the bad news. The good news is that it could be much worse if petrochemical companies had not cut back on their consumption of propane.

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The propane market found reason in the 2.7-million-barrel inventory draw to keep prices on a rise. The biggest draw occurred in the Midwest and correspondingly the Conway market had the biggest uptick in price compared to the previous week. Crude managed to stay pretty flat, and that would keep propane in check. While we believe another good draw is in order, propane prices have moved to a level to discourage petrochemical usage. The potential for continued reduction in petrochemical demand gives us a neutral outlook on prices.

Monday: Propane prices marched higher to start the week, with Conway trading at a new high for the year. Propane inventory levels in the Midwest and strong crop drying in that region helped Conway trade higher than Belvieu.

Tuesday: Propane at both hubs dropped one-eighth of a cent, which was a strong day given what was happening with crude. WTI crude fell 1.3 percent, while propane strongly resisted the fall with its minor loss.

Wednesday: Propane prices pushed higher after the EIA reported propane inventory had declined 2.729 million barrels last week.

Thursday: Propane prices were unable to extend the gains that followed the EIA report on Wednesday. Falling crude provided some of the headwind, but Belvieu propane outpaced WTI to the downside, showing that at least Belvieu propane was weak in its own right.

Friday: Propane prices ticked up at the end of the day as crude was showing a little more life. Belvieu traded at its highest price of the day, at 118 cents, right as crude trade was closing.

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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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