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Trader's Corner

This week’s Trader’s Corner looks at the recent drop in propane demand.

Just last week, our focus was on Midwest propane inventory and how low it might go before the end of winter. In that discussion, we predicted that inventory would likely drop for seven more weeks, though we assumed the rate of decline would slow. In just three short days, the U.S. Energy Information Administration (EIA) Weekly Status Report made that prediction look foolish. It reported a 0.771-million-barrel build in Midwest propane inventory for the week that ended on Jan. 31.

Initially we thought the number had to be a mistake, but the EIA stood behind it. The report covered the fifth week of the year, which had averaged a 3.186-million-barrel draw on inventory. An industry poll resulted in an average expected draw on inventory of 2.9 million barrels. Obviously we weren’t the only ones scratching our head when the EIA reported a modest 0.832-million-barrel draw on U.S. propane inventory that included the 0.771-million-barrel build in Midwest inventory.

In speaking with Midwest retailers, all seemed to be struggling to find supply, and we had visions of transport drivers lifting hoses to try and drain the last drop of propane from supply points. Instead we find out inventory was building. Bruised ego and all, we tried to figure out how the inventory number was so different from expectations.

It didn’t take long to find the smoking gun. Propane demand had fallen sharply.

Demand dropped from 1.654 million barrels per day (bpd) for the week ending Jan. 24 to 1.308 million bpd for the week ending Jan. 31. That was a drop in demand of 2.422 million barrels for the week.

The result was the surprisingly modest 0.833-million-barrel drop in propane inventory, significantly down from the draw of 3.591 million barrels the week of Jan. 24. Of course, the 2.422-million-barrel decline in demand accounted for the bulk of the difference. An increase in imports and production added 0.336 million barrels from the supply side.

Such a sharp drop in demand was a bit puzzling given most of the feedback we were getting. However, at this point we have to assume that the high prices had a dramatic effect on demand for the week ending Jan. 31. It was really the week ending on Jan. 24 when the bulk of the price spike occurred, but it appeared the impacts on inventory were not being felt until the week ending Jan. 31.

Actually that makes a lot of sense because much of what was moving in the supply system the week of Jan. 24 would have been priced before the price spike in Conway. Product moving during the week ending Jan. 31 would have been pricing in the full fury of the propane price spike that had occurred the week before. So if we are willing to blame the big drop in demand and thus the light inventory draw on high prices the timing seems to make sense.

If that is a correct assumption, it may have only served to backlog demand with the potential to cause larger-than-normal draws in the coming weeks now that Conway prices have come down.

Another huge jump in the price spread between Mont Belvieu and terminals on the Dixie may cause the same effect on Mont Belvieu inventory. The spread between Mont Belvieu and Hattiesburg has blown out to 140 cents.

As we have said, there are so many variables affecting supply, and thus price, that it makes the prediction business a perilous game to play. Still, it is human nature to try and predict the future. The game is not over yet. Though our prediction of seven straight weeks of inventory draws in the Midwest was quickly debunked, our other assumption may still come to fruition.

As you recall, we predicted the low end-of-winter inventory, a slow rebuild of inventory and the possibility that propane will be valued near the 70 percent range of West Texas Intermediate crude this summer rather than the 25 to 35 percent valuations of recent years. Nothing would make us happier than to be wrong on those assumptions, as well.

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Conway propane appeared to find a bottom and Mont Belvieu gained despite a light draw on U.S. propane inventory. It still appears to be a seller’s market, which will keep us bullish to start the week.

Monday: Conway propane prices dropped sharply as they continued their retreat from the recent price spike. A drop in construction spending during December contributed to a fall in crude. Mont Belvieu fell in line with WTI crude.

Tuesday: The downward momentum for Conway propane slowed dramatically and Mont Belvieu propane more than recovered Monday’s loss. Bargain hunters helped push crude higher following the retreat on Monday.

Wednesday: A surprisingly light draw in U.S. propane inventory, including a build in Midwest inventory, sent Conway propane sharply lower. Mont Belvieu propane shook off the bearish inventory report to match its 1.6 percent gain from Tuesday. A draw in Cushing, Okla., crude inventory sent WTI crude higher.

Thursday: Conway propane finally stopped its downward slide with a 5-cent gain, but surprisingly Mont Belvieu propane gave up 1.5 cents. WTI crude used a positive weekly jobless claims report to maintain its upward momentum.

Friday: Propane prices at both hubs were firming up ahead of the weekend. Despite the light draw on inventory reported on Wednesday, it was still a seller’s market. Crude rallied even though the Labor Department reported disappointing numbers for January jobs growth.

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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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