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Trader's Corner
This week’s Trader’s Corner looks at petrochemical activity.
When you share a pond with another fish, it isn’t a bad idea to take note of the size and demeanor of that fish. In the propane industry, we share our pond with a big fish that can sometimes have a voracious appetite for the same thing we consume. Fortunately this winter, the petrochemical industry has been gorging itself on other prey, leaving more propane for us.
Given the fragile state of propane inventory, it is fortunate that petrochemical companies have a smorgasbord of natural gas liquids (NGLs) they can use to fill their feedstock needs. With retail propane’s singular meal choice, it is good the other fish in the pond has a more balanced diet plan.
The latest data (through November) shows that petrochemicals have been increasing their consumption of NGLs since May when 1.516 million barrels per day (bpd) were consumed. Total consumption in November hit 1.667 million bpd. However, as the chart below shows, even though utilization rates have been increasing, propane consumption has been declining.
Petrochemical facility utilization rates in November hit 94.4 percent, about the same as the 94.6 percent of last November. However, in November 2012, petrochemicals were consuming 462,000 bpd of propane compared to 378,000 bpd this past November.
The escalation of propane’s prices over this past year has pushed petrochemicals to increase the consumption of other feedstock where output requirements allow.
Ethane has been taking up the slack for propane, hitting 63.5 percent of the feedstock stream in November 2013, where it was just 58.1 percent of the stream in November 2012. Consumption of the lighter NGL has gone from 965,000 bpd to 1.058 million bpd.
Of course, petrochemical companies are simply being compassionate, helping the propane-strapped retailer market – hardly so. It is a fish-eat-fish world, and petrochemicals have found ethane to be a more abundant, tasty morsel. OK, they are on to ethane because it’s relatively cheap.
In November 2012, Belvieu propane averaged 89.4375 cents, while it averaged 118.2993 cents during November 2013. Meanwhile, ethane that averaged 29.0656 cents per gallon in November 2012 was trading for an average of 24.9705 cents in November 2013.
November 2013 ethane’s price was the equivalent of about 31-cent propane. Thirty-one-cent-propane-equivalent ethane or 118-cent propane? Where they can, the petrochemicals will chomp on the ethane. Obviously it is not all about price for petrochemicals, or they probably wouldn’t be consuming anything except ethane. Customer demands dictate decisions on the type of products petrochemicals need to yield.
Recently in Trader’s Corner we discussed that even though propane prices have been going up from their historically low relative values to crude, they still have not experienced the type of price spikes that one would have expected a few years ago with inventory positions so low.
Propane is currently at 58 to 63 percent of West Texas Intermediate (WTI) crude. At current inventory levels, propane priced at 90 to 100 percent of WTI crude would have been highly probable a few years ago. We have been asking ourselves why the difference.
Frankly we are not sure we have the answer, only a theory. The fact is there is substantially more propane production today than when those spikes were occurring. Today at least, with tweaks in by petrochemicals, like we have illustrated today, and changes in propane exports, more propane can be made available to the domestic propane market.
This Trader’s Corner has focused on the reduced consumption by petrochemicals. However, on the export side, more butane is being mixed with propane to fill export demand, which is keeping a few more barrels of propane at home. Obviously propane did not have to reach 90 to 100 percent of crude to push the market to make these adjustments.
Of course, that is the potential good news, if the theory holds true. The more concerning development this winter has been the lack of propane in places it needs to be to meet domestic heating demand. Changes in NGL infrastructure have favored meeting export and petrochemical demand over domestic heating demand.
At this point, this development has us more concerned than the increase in propane prices at the hubs. The story now is becoming the price differences being experienced between the major propane supply hubs and the demand centers.
Slack capacity in propane infrastructure used to serve us well. But producers and pipeline companies have been working on cutting the slack, and that has generally meant cutting retail propane out.
Unfortunately at a time when propane retailers are already seeing lower volume through tanks and rapid increases in other expenses, they may have to invest more in ways to manage the price spread between their location and the hub. More challenges? If you are a propane retailer, the response is, “What’s new?”
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
Propane traders want to trade the weather outlook, which caused Conway prices to fall this past week. But inventory positions are making a major selloff difficult. We go into the week neutral.
LAST WEEK'S DAILY HIGHLIGHTS
Monday: Extremely cold weather pushed propane prices higher to start the new week. Crude fell as some of Libya’s crude production resumed.
Tuesday: Despite cold weather, it was becoming apparent that propane traders were focused more on weather outlooks than current conditions. Even though Midwest propane inventory levels remain low and most retailers were struggling to find wet barrels, Conway propane prices fell. Belvieu inched higher with crude.
Wednesday: A 3.468-million-barrel draw on propane inventory, most of which came from Gulf Coast stocks, lit a fire under Belvieu propane prices. Even though the draw on Midwest inventory was nearly double its five-year average for week one of the year, prices in Conway slipped. A surprising 1.1-million-barrel draw in Cushing, Okla., crude inventory had WTI crude falling.
Thursday: Wednesday’s bullish inventory report only delayed a day what it seemed the Conway propane market wanted to do – go lower. Ever sensitive to weather, Conway propane fell a nickel despite extremely low inventory levels because of forecasts for a warming trend. Belvieu was little changed on the day, and crude fell further because of the Cushing crude inventory build.
Friday: Propane prices bounced higher in early trade, but gains were difficult to hold. Conway slipped to a quarter-cent loss by the close, while Belvieu eked out a gain of a quarter cent. WTI crude rebounded from earlier-week losses, primarily from reports that Chinese crude imports increased 13 percent during December. |
