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Trader's Corner
This week’s Trader’s Corner looks at the inventory situation in the Midwest and the related price spike in Conway propane.
If you follow Trader’s Corner regularly, you know we have talked about how this year has been different because we have avoided a price spike despite low propane inventory.
Frankly we marveled two weeks ago when Conway propane prices actually fell 5 cents a day after an above-average, 1.2-million-barrel draw on Midwest propane inventory. That draw had Midwest inventory 39.4 percent below last year and 34.3 percent below the five-year average. Midwest inventory levels fell to 11.538 million barrels, around 6 million barrels higher than the lowest end of winter inventory levels seen in the last 10 years, with plenty of winter still ahead.
Yet, for the week of that inventory report, Conway propane prices fell 2.71 percent or 3.875 cents. On Thursday of that week, we wrote the following to our readers in our daily report:
“Conway propane prices came unhinged a day after the EIA reported on inventory. Even though the data showed an above-average draw in Midwest inventory, buyers seemed unimpressed. Most of the positive reaction was reserved for Belvieu, where the inventory draw was more substantial. Propane had been showing signs that it wanted to sell off, and rumors were that all of the interest was coming from the seller side. Wednesday’s supportive inventory number seemed to only delay a day what the market really wanted to do.
Conway has always been extremely weather sensitive. A short warming trend generating high probabilities of above-normal temperatures for a few days began to get the attention of sellers fostering a “bird in the hand” bias where they became eager sellers with Conway already trading 20 cents above Belvieu.
When prices started falling early this morning, the rout was on with solid trading volume getting done. Belvieu managed to post a small gain, but even that had a bearish feel to it given the much higher-than-expected draw on Gulf Coast propane inventories last week.
Most propane retailers seem to be holding to a more bullish bias, conditioned by weeks of struggling to find supply to meet strong demand. While most retailers acknowledge the break in the weather, they point to more normal temperatures soon to follow. Further they all seem to be drastically behind in meeting demand, meaning a few days of milder weather will do little to slow down their supply needs.
We have reached that time of year when it becomes a weather bet and prices tend to respond more to the latest temperature forecast than to the latest inventory number. But...a resumption of cold weather could quickly firm up prices. Price direction is generated by the sum total of the knowledge of all market participants. While propane retailers in the Midwest may find it hard to see where the bearish outlook is coming, other participants seem to be seeing fewer reasons to be bullish.”
As you can see from that narrative, we were having a hard time justifying the fall in Conway prices that week given the inventory picture. And as some of our other Trader’s Corners have suggested, we had been pleasantly surprised that propane prices had not spiked because of the inventory tightness.
Inventory has not been this tight for several years, but not long ago propane would have easily been trading at 90 to 100 percent of West Texas Intermediate (WTI) crude with inventory so low. Yet propane was still trading from 50 to 60 percent of WTI this year – that was until this past week.
Suddenly we feel we are in a horror movie marathon, strapped to our seat with no way to escape to avoid watching one gory scene after another. Looking at the inventory picture, one knew the potential to be frightened was most certainly there, yet propane markets seemed to give you little reason to be scared.
It now seems it was the old spook house trick of having gaps in the things that scare us, so we fall into a false sense of security. Then when the skeleton suddenly pops out of the closet, we are shocked out of our wits.
This past week the propane price situation certainly became a nightmare, and propane retailers are having a difficult time waking up. At least for now the horror continues unabated.
Below is a recent-history trading chart we provide for our readers each day. Be warned some viewers may find this disturbing and parents may want to prepare younger children for what they are about to see.
Oh the horror! The nightmarish price spikes that had once tormented us, but went dormant for a while, are suddenly back. Our false sense of security has been shattered. Since the inventory report on Wednesday of last week, Conway propane prices have been going up better than a dime per day.
What is interesting: This is a reaction to a 1.5-million-barrel draw on Midwest propane inventory. Keep in mind that the market shrugged off a 1.2-million-barrel draw just one week earlier. And while the draw did bring inventory lower, the rate of fall wasn’t much more than had been occurring for a while.
Looking at the chart above, the inventory situation was just as bad the week before when prices went down 5 cents. One could easily argue it wasn’t as bad this past week because the end of winter is one week closer.
A week ago traders were telling us there were many aggressive sellers, as many were giving up on winter. Now everyone is a buyer.
At this point, the horror movie marathon looks like it could continue. The map below shows temperature probabilities for the end of this month.
The map above is a probability chart on whether temperatures will be above or below normal. The dark blue means there is a high probability of below-normal temperatures in high propane-consuming areas.
It is beginning to appear we had misplaced hope that new domestic production would prevent major price spikes. The dragon has not been slain; it was simply dormant for a while. Even with this surge, Conway propane is still just 78 percent of WTI crude, which doesn’t approach some of the historically high price spikes. But as the weather and inventory charts suggest, we still might be far from the top.
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 got a big boost from the 3.7-million-barrel draw on inventory. Last week’s startup of the southern leg of the Keystone XL pipeline was pushing WTI. Weather also looks supportive. We are bullish to start the week.
LAST WEEK'S DAILY HIGHLIGHTS
Monday: Belvieu and Conway reversed their trends from the previous week, with Belvieu dropping and Conway moving up. Progress in the Iran nuclear talks had WTI crude moving lower.
Tuesday: Positive news on U.S. retail sales was one of the drivers sending WTI crude higher. Propane continued reversing what had transpired the week before. Traders chipped away at the previous week’s gains in Belvieu and reduced the losses suffered by Conway.
Wednesday: A major surge in propane prices occurred following a reported 3.7-million-barrel draw on propane inventory. Crude was also supported by a 7.7-million-barrel draw on U.S. crude inventory.
Thursday: The surge in propane prices continued as traders responded to inventory positions and forecasts for colder weather to close out the month. WTI crude was little changed as traders were cautious ahead of fourth-quarter earnings reports.
Friday: There was no letup in spiking Conway propane prices, and the rally picked up momentum in Belvieu as well. Crude was a bit choppy as traders squared books before the weekend due to Monday’s holiday and Tuesday’s February crude contract expiration. |
