Propane Price Insider
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Trader's Corner

This week’s Trader’s Corner looks at the drop in propane demand that led to an inventory draw that was below expectations.

Before the latest Weekly Status Report by the U.S. Energy Information Administration (EIA), a survey of propane traders showed that on average they expected a 2.1-million-barrel draw in propane inventory. The week prior, the inventory draw had been 2.7 million barrels.

The 2.7-million-barrel draw and the expectations for a 2.1-million-barrel draw were driven by strong crop-drying demand for propane. However, when the EIA reported the inventory draw for the week ending Nov. 8, the draw was just 1.255 million barrels.

Even though it was below expectations, the draw was around 2.5 times the average draw of 0.497 million barrels that has occurred during week 45 of the year over the last five years. A drop-off in propane demand was the key reason the draw was below expectations.

Demand had spiked to 1.775 million barrels per day (bpd) during the week that inventory fell 2.7 million barrels. But for this last report, demand had fallen 14 percent week to week to 1.526 million bpd. That amounts to a decline in demand of 0.249 million bpd or 1.743 million barrels for the week.

That primarily accounts for the difference between week 44’s 2.7-million-barrel draw and week 45’s 1.2-million-barrel draw. It appears obvious that in making their estimates traders were expecting crop drying to keep demand closer to the 1.775-million-bpd rate.

Since the EIA reported inventory on Thursday, propane prices have been a little softer. On Thursday, Belvieu propane did not go up, continuing to trade at the 119.5-cent Wednesday close. Conway was up just a quarter-cent over its 122-cent Wednesday close. As we write on Friday, propane is down about a half-cent. Prices had been up 1.2 percent Belvieu and 1.7 percent Conway on Wednesday ahead of the report, indicating expectations for a bigger draw.

Obviously it was the difference in perception of what inventory numbers would be and what they were, rather than what they were relative to history that is causing the sudden lack of upward momentum for propane prices. As the chart below shows, despite the lighter-than-expected draw on inventory this last week the cumulative effect of a strong crop drying season on U.S. inventory is evident.

Looking at this chart, we would have to say there is still plenty of potential upside price risk resulting from this crop drying season. If early-winter heat demand is average to above average following this strong crop drying year, we could see propane set more new highs for 2013.

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A propane inventory draw that was below expectations slowed the upward momentum in propane prices over the final two days of the week. Crude has failed on numerous attempts to break its downtrend. As the report above shows, we are a little worried about the nearly 6-million-barrel inventory draw over the last month, which represents upside price risk for propane. That will keep us neutral to start the week.

Monday: Failed Iran nuclear talks, increased oil usage in China and deteriorating geopolitical conditions in Libya combined to drive crude higher. Propane struggled to keep up despite support from crop drying.

Tuesday: Worries that the Federal Reserve might start cutting back on stimulus measures were the key reason for a significant sell-off in West Texas Intermediate crude. Propane resisted the fall, however.

Wednesday: Propane moved higher on defensive buying before the holiday-delayed EIA inventory report. Higher crude, cooler weather and crop drying all contributed to the uptick.

Thursday: The EIA reported a draw that was below expectations, which caused propane prices to lose their upward momentum. The 1.255-million-barrel inventory draw was well above average for week 45 of the year, but well below the 2.1-million-barrel draw expected.

Friday: Propane continued to show post-EIA-report weakness despite inventory falling to near five-year lows. Crude continued to struggle to break out of its downtrend despite positive comments from Federal Reserve Chair nominee Janet Yellen.

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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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