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Trader's Corner
This week’s Trader’s Corner looks at U.S. and Canadian propane inventory.
North American propane inventory levels are concerning as we end the year and prepare for the second half of winter. At this point, there is little positive news one could offer on the inventory situation.
With last week’s 2.516-million-barrel draw on U.S. propane inventory, the sharp downtrend remained intact. The draw was well above the five-year average for week 51 of the year, but it was not as much as the 3.7 million that was expected.
As of this report, U.S. propane inventory is 31.1 percent below last year and 17.2 percent below the five-year average.
As we showed last week, the situation in Canada is not much better.
Through November, Canadian inventory was 18 percent below average and near five-year lows.
Almost at every point in the country, propane retailers are experiencing higher-than-expected prices and often-inflated price differentials to Mont Belvieu and Conway. For example, retailers dependent on the Dixie pipeline are seeing price spreads to Belvieu around 12 to 16 cents higher than normal.
In many parts of the country, propane retailers would be happy to find barrels at almost any prices, as many have struggled to find enough to keep up with demand. Many have reported working at the bottom of their tanks and having to do partial fills to customer tanks to spread scarce gallons around in a hope to avoid customers running out of supply.
What is maddening is that many propane trucks that might have helped ease the problem are in Y-grade service. That means they are being used to move a natural gas liquids (NGL) mix from natural gas production facilities. Ironically the higher NGL production that most assumed would keep the U.S. market well supplied is also taking much-needed propane transports out of the loop.
Almost without exception, infrastructure changes have been made to the detriment of the propane retailer. The Cochin pipeline that used to bring propane supply to the U.S. from Canada is being reversed. One of the product lines on the TEPPCO system that used to bring supplies to the Northeast is being reversed to move ethane.
And of course, there is the much-publicized exporting of U.S. propane that has now reached about 12 million barrels per month. In addition, the U.S. petrochemical industry is expanding, and even though it has slowed its use of propane recently from above 500,000 barrels per day (bpd) to around 350,000 bpd it is still solid demand.
The U.S. Energy Information Administration (EIA) projects the continued increase in U.S. natural gas production for years to come. At some point, one has to hope the economics for all of the projects that are causing the tightening of U.S. domestic propane supplies will look less appealing and the increasing natural gas/NGL supplies will catch up.
Unfortunately that point is likely reached when U.S. propane prices are at even higher relative values to crude and other energy sources than the seemingly inflated prices of today.
What we must remember is that propane used to regularly trade at 70 to 75 percent of the value of West Texas Intermediate (WTI) crude. It was not unusual to see propane prices spike to well above those relative values during peak-demand periods before all of the new natural gas/NGLs production.
So if there is a bright spot at the moment, even with the tight inventory conditions, propane at Belvieu is 53 percent of crude and Conway is at 61 percent of crude. It has been a while now, but it used to be commonplace for propane to trade at 80 to 90 percent of crude during the winter. Propane at 90 percent of WTI crude right now would be about $2.14 propane at the hubs. What made the pre-natural gas production boom situation worse is that there truly was a supply shortage.
By contrast, there is plenty of supply today; the issue is that the U.S. domestic propane market is firmly in the producer target markets. Whether it is exports, petrochemicals or crude producers using propane as a diluent, there is a fairly steady year-round demand from those areas. That is something domestic retail just can’t provide and is likely a big reason infrastructure projects for meeting that segment of propane demand is low.
The days of oversupply, with propane valued at 30 to 35 percent of crude, has passed, we suspect never to return. The question remains if all of the new production has eliminated the 90 percent and higher propane spikes. The way this winter is going, we may get the answer sooner than later. Perhaps a steadier, middle-of-the-road valuation might not be a bad compromise when we remember the days of declining U.S. natural gas and crude production.
Call Cost Management Solutions today at 888-441-3338 for more information about how Client Services can enhance your business, or drop us an email at info@propanecost.com.
WEEK IN REVIEW
Weather and inventory levels turned propane prices higher once more. Crude gained on positive U.S. economic reports. We will be bullish on propane prices to start this week.
LAST WEEK'S DAILY HIGHLIGHTS
Monday: Crude struggled to attract investors, who seemed more interested in buying U.S. equities. Propane was mixed, with upward pressure remaining on Conway prices, but Belvieu slipped.
Tuesday: Buying ahead of Christmas pushed propane and crude prices higher. More positive U.S. economic data, this time on durable goods orders, supported crude.
Wednesday: Markets closed for Christmas.
Thursday: Propane prices, especially in Conway, continued to climb coming out of the holiday. Inventory remained tight, and propane retailers in many parts of the country were struggling to find enough supply to keep up with demand.
Friday: The holiday-delayed EIA report showed a lighter-than-expected draw on propane inventory. Even though the draw was higher than average for week 51 of the year, the fact it was below expectations softened propane prices post report. Data for crude was supportive of prices, causing WTI to extend gains immediately after the report. Despite the post-report pullback, Conway still set a new high for the year. |
