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Trader's Corner

This week’s Trader’s Corner looks at Gulf Coast propane inventory.

In recent weeks, much of the focus has been on Midwest propane inventory and prices. This week we are shifting focus and looking at Gulf Coast inventory. We had looked at the Gulf Coast situation in our daily report the day before the latest Energy Information Administration (EIA) Weekly Status Report.

That report revealed a well-above-average Gulf Coast inventory draw of 2.055 million barrels, putting Gulf Coast inventory at just 15.616 million barrels. As a result, we had to do some updating to share the same information in this report.

As the chart reveals, Gulf Coast inventory that started winter near five-year highs is now near five-year lows. Interestingly the initial reaction to the inventory report was bearish. At the time, propane markets simply had downward momentum. The focus was on temperature forecasts that were showing the probability of above-normal temperatures for most of the U.S. in the second half of February.

In addition, the Federal Energy Regulatory Commission (FERC) had for the first time used its powers to force Enterprise Products Partners to prioritize propane on its 20-inch products pipeline running from Mont Belvieu to the Northeast. Shipments of other products, such as gasoline, were moved back to make room for 500,000 barrels of propane to move up the pipeline ahead of schedule.

According to other reports, seaborne cargoes totaling 952,381 barrels (40 million gallons) would continue to arrive on the East Coast during the remainder of February. Also, there were reports of U.S. propane export cargoes being canceled. With the weather outlooks and supply news in hand, propane prices started a precipitous drop on a general feeling that supplies would make it to the end of winter.

On Thursday morning, Mont Belvieu propane traded to a low of 130.5 cents and Conway 130 cents. Remember this drop was occurring on the morning after an above-average 2.941-million-barrel draw had been reported on U.S. inventory. As recently as the previous Monday, Mont Belvieu had traded at a high of 177 and Conway 195 for barrels that could be delivered anytime this month.

However, after the initial drop, propane prices started recovering and by the end of the day both Mont Belvieu and Conway propane were trading up for the day. Mont Belvieu was as high as 149 cents and Conway 152.5 cents before trading ended. The result was around a 20-cent spread between the high and low for the day – considerable volatility, to say the least.

On Friday, propane prices were continuing to move higher. It certainly appeared there was a refocus on current conditions rather than temperature outlooks. Whether one looks at the present or future projections, the fundamental picture for propane is tight. The chart below shows current Gulf Coast inventory against previous years at this point in the year and where winter inventory ended in those years.

In the chart, the red bar represents propane inventory at week 6 for each of the years. The green bar is the low inventory position at the end of winter. The yellow bar is an estimate for 2014 based on the average change from week 6 until the year’s low was posted during the previous years.

When we did the same chart last Tuesday, we only had data through week 5. Using that data, we said it was unlikely Gulf Coast inventory would reach the 9.874-million-barrel low of 2003. However, the week 6 draw of 2.055 million barrels, which was nearly three times greater than the week 6 five-year averages, makes that possibility much greater.

As we showed a couple of weeks ago, Midwest inventory is going to approach all-time lows, if not set a new low. Now it would appear Gulf Coast inventory is going to be in the same situation. The National Energy Board of Canada just reported a 48 percent decrease in Canadian propane inventory over the last month. Inventory was already near the five-year low.

Milder weather, propane imports, a reduction in propane exports and lower demand due to high prices may keep U.S. inventory from setting all-time lows, but nonetheless there is going to be a steep hole to climb out of this summer as North America prepares for next winter. In order to build inventory, propane exports will have to be held in check. For that to happen, U.S. propane prices will have to be more reflective of the global market.

During the selloff on Thursday, front-month propane was trading down to around 55 percent of West Texas Intermediate (WTI) crude. In our view, that number is unlikely to prevent many exports. Once the downward momentum was broken, it appears propane markets realized prices had probably gotten overdone to the downside for current conditions, resulting in the quick rebound.

Going forward, we must change our paradigm concerning U.S. propane prices. The price level during the last couple of summers, when propane was trading at around 30 percent of WTI crude, was the anomaly. Current propane valuations of around 66 percent of WTI crude are much more normal and, in fact, still low considering inventory positions.

If a propane retailer is waiting for the big pullback this summer to buy propane at 30 percent of WTI, he will likely wait a long time unless the fundamental picture changes considerably.

We hate to say it, but the low valuation party of the last couple of years is likely over. If you hang around that ballroom too long, you may not be dressed appropriately for the next party, which starts in about seven months.

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
The correction in propane prices continued, but seemed to find a floor on Thursday, rallying to close the week. Given the inventory situation, we like the valuation here, despite some wanting to give up on winter. We were neutral to start the week.

Monday: Propane prices surged higher to start the day, but faded in late trade on news that FERC had ordered Enterprise Products Partners to prioritize propane shipments from Mont Belvieu to the Midwest and Northeast.

Tuesday: Propane prices plunged on milder temperature outlooks and hopes more supply would be available to the Midwest and Northeast during February.

Wednesday: Shaking off an above-average draw on inventory, propane prices continued their rapid decline. A draw on Cushing crude inventory helped crude post a small gain. Surprisingly good import/export data from China encouraged buying, as well.

Thursday: Propane prices plummeted in early trade, reaching lows around 130 cents. But a strong rebound had both hubs trading around 150 cents by the end of the day. The International Energy Agency reported crude inventory of industrialized nations had declined 1.5 million barrels per day during the last quarter of 2013. That news limited the downside for crude, which was struggling against mounting technical weakness.

Friday: Propane prices continued to forge higher ahead of the holiday weekend. A decline in U.S. factory activity helped limit buyers for WTI crude, allowing prices to drift lower.

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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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