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Trader's Corner

This week’s Trader’s Corner looks at some of the issues with U.S. propane supply.

The shale gas revolution overwhelmed U.S. natural gas and natural gas liquids demand, and the price of both plunged in the last few years. There were stories that propane would be running freely down Main Street of most every town in America with such abundant supplies. Yet this past week we saw Conway wet propane getting done at more than $5 per gallon. What the heck happened?

Indeed natural gas production in the U.S. continues at record levels and propane production at natural gas plants is steadily rising. The chart below shows natural gas plant propane production since 2005 through October of 2013, the last official monthly data available.

In October, propane production from natural gas plants was running at 846,000 barrels per day (bpd). Fuel-use propane production from refiners had been declining but is starting to stabilize. Even with the fuel-use production from refineries lower, the chart below shows overall U.S. propane production is on the rise.

Yet the chart below reveals the current U.S. propane inventory level is setting new five-year-low marks and has been since November of last year.

The data to this point in the discussion still begs the question of how propane inventory could be setting five-year lows with so much production. Many would blame the cold weather. That has certainly been a contributor, but through Jan. 18 heating degree-days of 2,272 is exactly the norm. This has been a colder winter than what has been experienced recently, but it is really just a normal winter by historical standards and propane supplies can’t handle it.

The more glaring contributor has been the increase in propane exports.

The latest available data on U.S. exports is for October, but the trend is evident. Note the brown columns are the U.S. Energy Information Administration (EIA) weekly estimates on exports. Those estimates are consistently below the official monthly data, but you can see the export trend continued to be up through the end of the year. That has also been the case so far this month. Based on the trend, it would not be out of line to expect the official export number for December to be 14 million barrels. So why all of the exports?

U.S. propane got extremely cheap relative to the global market. A producer could sell his propane to as far away as Japan and still make a much better netback than selling in the U.S. For propane producers, Tokyo looked brighter than Times Square. Buyers in Latin America, Europe and Japan were hungry for cheap U.S. propane.

Believe it or not, even with the increase in Belvieu propane prices recently, propane prices in Europe are still higher, at around 185 cents per gallon. But we have now reached the point that, when shipping costs are considered, there is little, if any, advantage for a Northwest European buyer to take propane from the U.S. Some are likely contracted to do so anyway.

Europe has been having a mild winter, with demand about 30 percent below normal. Its inventories are full, and some of the cargoes coming from the U.S. Gulf Coast are being sent back to the U.S. East Coast. Obviously that isn’t efficient, but foreign-flagged ships can’t take product from one U.S. port to another.

Prices and conditions in Europe are to a point where there should be some relief in the rise of export activity, but it is hard to say how quickly the impact will be felt. But exports are only part of the story, and frankly they are the part that concerns us the least.

The same cheap prices that drove exports have caused major changes in the U.S. infrastructure for delivering propane from production and processing areas to demand centers.

For example, the TEPPCO pipeline system was the primary way to get product from Texas to the Northeast. That system used to have two lines that could deliver propane. One was totally dedicated to propane and the other was a batch line that delivered propane in addition to other products. Essentially the propane line would meet most demand situations and the batch line could plug the gaps in high-demand conditions.

However, the dedicated propane line has been changed to carry ethane south, leaving only the batch line for propane. Since propane is seasonal, shippers of other products dominate line allocation during the winter. To make matters worse, one of the main storage facilities off the system at Todhunter (Ohio) has had issues, eliminating a valuable asset that was once used to augment supply in high-demand periods.

The Cochin pipeline, which has delivered propane from Canada to the U.S., was down during the critical crop drying season this year as its owner prepares to reverse that line. By the middle of the summer, that line will no longer be an import option for propane. Canadian propane supply has been tight too, so propane movement on the Cochin has been limited for a while.

One can see why a company would want to put these pipeline assets into different service. The products they are or will be shipping are more likely to give them steadier movement on their pipeline system than seasonal propane, thus yielding more revenue.

Longer term, the export issue will be resolved by global markets. U.S. propane prices will trade relative to the global market, and that will make the U.S. domestic market as appealing to a producer as any other. In addition, the imbalance between U.S. crude and global crude prices is rapidly being resolved. That too will help the U.S. market to become more appealing for propane and other energy products.

Overall, the U.S. market became too undervalued to the global market, and efforts to correct it came to fruition this winter. The pendulum will swing the other way and eventually a balance will be struck. Even though the relative cheap propane prices of the last few years are a thing of the past, a U.S. market that is globally competitive will actually be a good thing for propane retailers and customers, in that it could keep more U.S. production at home.

Much more difficult to foresee is what, if any, infrastructure changes will be made that could help eliminate the logistical issues the propane industry has faced this year. What adjustments will be made to compensate for the recent changes in U.S. propane infrastructure that has made this year so challenging? What can and will be done to keep propane as a reliable, affordable home-heating source in future years?

In fact, it is even difficult to figure out what companies will invest in these projects. New fractionators are being constructed nearer the demand centers, but how will the products be managed, where will they be stored and will there be any slack in the system for high-demand periods that are the nature of retail propane?

Propane retailers have just left a favorable pricing-and-supply period and are entering a much more challenging time. Long conversations with suppliers on topics like allocation and summer/winter ratios are about to take place. Propane dealers will have to focus on wet barrel supply issues more than ever before.

We have to get beyond the blame game and let go of the expectation that someone else is going to solve this problem. The first thing we have to do this summer is pull from only supply locations where allocation and summer/winter ratios may have some meaning. Then we have to think of other things we can control. Most of us will not be able to buy a pipeline or mine a storage cavern, but perhaps we can gain more control of when propane goes into our customers’ tanks with budget programs.

Be sure to have discussions with your supplier about any new infrastructure moves that might be occurring in your area. If you haven’t had access to a rail terminal or an import terminal, this summer will be the time to explore those options.

Every supplier has had problems this winter, but don’t forget those who worked hard to find supply for you. Have frank discussions with them about what you can do to make the system work the best for you both.

We know you are exhausted and will be more so when this current supply catastrophe is over. But when you have time to look up, we encourage you to immediate begin strategizing and planning for next year’s physical supply. Like you, we will hope for some infrastructure changes that may make a difference next year, but we wouldn’t count on it. About all you can do right now is focus on what you can control and be willing to explore new ideas to secure supply.

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
Conway prices exploded to record highs, with tight inventory and weather in support. Prices at Conway were falling sharply on Friday, but we fear the focus is just shifting to Belvieu and more pressure will be on prices there this week. Therefore, we are neutral to start the week. But overall, we are concerned with upside risk at Belvieu.

Monday: Markets closed for Martin Luther King Jr. Day.

Tuesday: Propane surged higher coming out of the holiday as more cold weather taxed already-low inventory levels and made finding wet barrels difficult. West Texas Intermediate (WTI) crude was up a day ahead of the opening of the Keystone XL pipeline, which is expected to draw down Cushing, Okla., crude inventory.

Wednesday: Conway propane prices continued to blow out with a 79-cent gain. Belvieu was relatively subdued, rising with WTI crude. WTI crude’s primary support remained the opening of the southern leg of the Keystone XL pipeline, which began operation at a rate of 300,000 bpd.

Thursday: EIA reported a 3.391-million-barrel draw on U.S. propane inventory, sending propane prices at both hubs up sharply. Belvieu hit a high of 161 cents and Conway 493 cents for balance-of-the-month barrels. The price of wet Conway barrels reached 503.125 cents. However, in late afternoon trade, the price at both hubs was retreating rapidly. Belvieu closed at 152.5 cents and Conway at 460 cents.

Friday: Propane prices were falling going into the weekend, as the upward momentum appeared broken on Thursday afternoon.
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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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