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Click here for a free, 10-day trial of The Propane Price Insider!
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.
Trader's Corner
This week’s Trader’s Corner is going to look at end-of-winter inventory levels for the Midwest and the outlook for this year.
Last Wednesday, the Energy Information Administration reported a 1.406 million barrel draw on Midwest propane inventory, which left it at 8.789 million barrels.
Midwest inventory levels are easily setting new five-year-low marks and have been since the middle of last year. During the four weeks of January reported so far, inventories have averaged a declining 1.371 million barrels each week.
The data for the report released by the EIA last Wednesday was collected on Jan. 24. Usually it is collected around the middle or end of March, before inventories start building. Last year, the first build came in the first week of April.
With Midwest dealers putting minimum amounts of propane in customer tanks currently, and inventory levels in just about every tank very low, the potential for pent-up demand to continue even after the weather slows is fairly good.
Mother Nature will have a lot to do with how much longer inventory will draw. But National Oceanic and Atmospheric Administration (NOAA) temperature probability maps suggest the Midwest is likely to have below-normal temperatures through at least the middle of next month.
After that point, the NOAA outlook moderates a bit, but temperatures are still looking like they will be at least normal in the Midwest.
Based on these factors one would hold out little hope that inventory would build before mid-March. Given the low propane inventory levels in Canada we aren’t expecting much additional help from the north.
Perhaps some help could come from the south. In a conference call with investors Enterprise Products Partners COO Jim Teague suggested some propane supply from the Hobbs, N.M., fractionator has been diverted to the Midwest. Also Oneok has made a filing with the Federal Energy Regulatory Commission to notyfy shippers that its Conway to Mont Belvieu pipeline, which carries propane and other products, could be reversed. The filing will be effective Feb. 6. However it must be clear Oneok has not said when or even if it will actually reverse the line, it is simply taking preliminary steps necessary to take that action.
Obviously there are many variables at play, and we know there are attempts across the supply chain to get propane where it needs to be, making predicting inventory levels difficult. Still, one can’t help but speculate on where Midwest inventory could end this winter.
The chart above shows low Midwest inventory levels for each year since 2003, which happens to be the lowest Midwest inventory in our records. That year, Midwest inventory fell to 5.392 million barrels.
At 8.789 million barrels, 2014 inventory is already fifth lowest over this timeframe. At this point, we would have to predict the next seven EIA inventory reports are likely to show a draw.
Even if we assume the gas from Hobbs and all the efforts to get propane from the Gulf Coast cut Midwest draws on inventory to 1 million barrels a week over the next few weeks, the 2003 low will be equaled in three to four weeks.
An interesting question is if it is even possible to hit that low. In order to access all the propane that is in storage, it has to be floated out of the caverns. To do that, brine is pumped into the caverns. Maintaining brine ponds is always an issue, and it is possible that with the high inventory conditions experienced in previous years that the available brine could be low.
At least one marketer with many years of experience in Conway says even if the brine is available, the lowest inventory could go before contamination issues would almost certainly arise would be around 2 million barrels. It is not inconceivable, based on the current data, to think that theory could be tested without significant shifts in demand or supply.
We had already heard that propane supplies coming from Conway were limited to daily production off the fractionators. Of course inventory has continued to come down, so we know some Midwest inventory was being accessed through the Jan. 24 data collection date for the last EIA report. Still, one has to be concerned when those kinds of rumors surface.
No matter what assumptions we make the odds favor the following to end up being true:
• Midwest supply will remain tight through at least February.
• Midwest inventory will end the winter near or at a record low.
• Inventory builds could be late getting started or modest as Midwest retailers replenish levels in customer tanks.
• Without changes in the way supply moves this summer, Midwest inventory could struggle to be at normal levels by the start of crop drying next year.
In the summer of 2012, Conway propane fell to a low of 26 percent of WTI crude. We predict that will never happen again. The five-year average low for Conway propane has been 42 percent of WTI crude. We think the possibility of staying above average this summer is highly probable.
In fact, it has taken Mont Belvieu propane at 77 percent of WTI crude and 70 percent of Brent crude to match the global market for propane and begin to affect propane exports. It would not surprise us to see U.S. propane maintain those price levels going forward. Propane at 70 percent of $95 crude is 158 cents.
Interestingly, next winter propane is trading under 60 percent of WTI crude. You might not want to let too much time pass before you think about next winter.
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
Conway propane fell sharply from its major spike but still remained elevated compared with anything we have seen in previous years. Unfortunately, fundaments remain very supportive as the gain in Mont Belvieu prices attests. We still believe there is upside price risk and will be bullish to start the week.
LAST WEEK'S DAILY HIGHLIGHTS
Monday: The week got started with a sharp fall in Conway propane prices as the major spike from the previous week continued to be unwound. Crude fell over concerns about demand from emerging economies and a drop in U.S. housing starts.
Tuesday: The sharp drop in Conway propane extended into its third day while Mont Belvieu prices climbed ahead of the upcoming inventory report. WTI crude rallied on expectations the EIA would report a draw on Cushing, Okla., crude inventory.
Wednesday: Conway reversed course and Mont Belvieu extended gains after the EIA reported a 3.589 million barrel draw on propane inventory. The draw exceeded the five-year average draw for week 4 of the year and industry expectations. Crude slipped slightly after Cushing inventory failed to draw and overall U.S. crude inventory built. Also a rising dollar, because of the Federal Reserve’s decision to keep cutting monetary stimulus, caused headwinds for crude.
Thursday: Propane prices were very volatile as they tried to adjust to the big spread between January and February prices with the end of the month near. Mont Belvieu prices continued to rise on the inventory draw, but January Conway pulled back slightly from its major jump on Wednesday.
Friday: The volatility in propane prices remained as traders struggled to balance prices between January and February barrels. Worries about crude demand from emerging economies returned as the key drive of crude prices with both WTI and Brent finishing the week on a weak note.
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COST MANAGEMENT SOLUTIONS
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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For a free 10-day trial subscription by e-mail, sign up online here or call toll-free at 888-441-3338.
Client Services
Many retailers simply don't have time to analyze the large amounts of data to make an informed purchasing decision.
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Supply cost analysis and recommendation as to effective hedging strategies
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Visit us online at www.propanecost.com. Or e-mail info@propanecost.com.
Contact us today to see if you can benefit from having the Energy Price Watchdog working for you.
Dale G. Delay 888-441-3338, ddelay@propanecost.com
Mark Rachal 888-441-3338, mrachal@propanecost.com |
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