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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This week’s Trader’s Corner projects potential 2014 summer propane prices using an historical reference.
U.S. propane prices have been retreating recently, even though inventory levels are low and there is still plenty of winter left. Total U.S. propane inventory is at 26.715 million barrels through week 7 of the year. Since 2003, the average inventory position at this point in the year has been 35.423 million barrels.
The low inventory position for this point in the year was set at 25.919 million barrel in 2003. We are less than a million barrels above that now. In 2003, inventory fell to an historic low of 18.167 million barrels. Inventory most often reaches its low at the end of March. Therefore, there is a high probability of up to six more weeks of inventory draws.
No matter when the last draw on inventory occurs, there is a good chance U.S. propane inventory will end this winter at a new record low or near it. So it begs the question as to why prices are falling. The answer is human nature. The sentiment of the industry right now is that we are going to make it through this winter without running out of propane. After such a stressful, high-priced winter, the relief is causing a bearish pricing pattern to develop. But will that bearish sentiment continue when the focus becomes next winter? To attempt to answer that question, we will use the likely closest historical reference, which is 2003. The chart below is going to surprise you.
The chart is for 2002 and 2003 propane prices. We are going to use the differences in summer prices between those two years to make some projections. But before we do, let’s focus on 2003 to further support the claim above that it is likely psychology or human nature as to why propane prices are currently falling. There is a tremendous amount of buyer resistance in these high-priced, end-of-winter conditions that tends to belie the fundamental realities.
Amazingly in 2003, just like this year, when propane inventory was at an all-time low, prices were falling to close out winter. However, they never returned to as low as the price levels of 2002, and you can see that prices were increasing in the heart of summer when traders began to switch focus to the next winter. The psychology shifts from propane feeling overpriced and not needed to underpriced and scarce.
There are many potential differences between 2002-03 and 2013-14, but we think it is not unreasonable to project how prices in 2014 might differ from 2013, by using 2002-03 for guidance.
In this projection, we are going to focus on April to October for two reasons. First, it is when most pre-buying and hedging will take place and when retailers will offer various programs to customers. Second, it becomes a winter bet after October and we aren’t in the business of projecting weather.
In the chart below, we will use the changes in price between the summer of 2002 and 2003 to project 2014 by applying the same change to 2013.
The projection yields an average price of 127.26 cents, with the best values coming early. The numbers are based on monthly averages. The table below provides real numbers to consider.
We also know that the value of crude has a lot to do with the value of propane. So it is prudent to look at how propane was trading to crude from 2002 and 2003 as well.
Between 2002 and 2003, propane’s valuation to crude increased considerably. The chart below projects 2014 prices using the propane-to-crude method.
Even though crude is currently more than $100, we are using a $95 estimate for 2014 crude. Currently most estimates for West Texas Intermediate (WTI) crude’s average for 2014 are in the mid-90s. However, in planning for next year, one should consider other potential prices for crude.
Using 2003 propane-to-crude percentages and applying those to 2013, we found the potential price of propane based on that method. We used the pure price-change method and the propane-percentage-of-crude method to yield a high/low range for the summer of 2014.
We will not go so far as saying this is our price projection for the summer of 2014; there are simply too many potential unknowns. However, there is enough similarity between 2003 and 2014 to give considerable weight to the above numbers for our supply strategies as we begin planning for 2014-15.
We have to remember that in 2003 the U.S. was a net importer of propane. Now we are a net exporter and that capability is rapidly increasing. That could require U.S. propane prices to stay at a higher relative value to crude to keep supplies at home.
In 2003, propane averaged 75.87 percent of crude between April and October. U.S. propane production and global propane values will help determine if that is the case in 2014. Though the U.S. is now a net propane exporter, and petrochemical capacity and thus consumption potential is increasing, propane production is also increasing. Obviously there will be a tug and pull between these forces to ultimately establish propane’s value this summer.
For now, we are seeing the above as a high-case scenario. But even if one projects 60 percent of $95 crude for the summer, the average propane price would be 135.71 cents. An even more optimistic projection of $90 crude and 55 percent propane yields 117.86-cent propane.
Using even the most conservative estimates, it is highly likely that propane will trade higher this summer than last summer and that the best buys will likely come in the early part of summer. History dictates preliminary supply positioning for the front half of next winter, taken between now and the end of April, should be considered.
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
With the general feeling in the market that propane supplies will hold up to get through this winter, propane prices have retreated in a major way. Our general feeling is the retreat has gotten overdone, as is evidenced by our Trader’s Corner above. We went into this week neutral, but remain concerned about a rebound.
LAST WEEK'S DAILY HIGHLIGHTS
Monday: Markets closed for Presidents Day.
Tuesday: Propane prices posted larger gains on weather forecasts of below-normal temperatures for most of the nation at the end of February. Crude was up on Libya tensions and expectations of a Cushing crude inventory decline.
Wednesday: Both hubs for propane declined sharply, reversing Tuesday’s gains, as traders were preparing for bearish inventory data. WTI posted a small gain after some profit taking early in the day.
Thursday: Propane prices plummeted in early trade, reaching lows around 137 cents. But a small rebound had both hubs trading around 140 cents by the end of the day. The U.S. Energy Information Administration (EIA) reported a 1.186-million-barrel draw in propane inventory. Crude posted a small loss as the EIA reported a 0.973-million-barrel build, which included a 1.733-million-barrel draw in Cushing crude inventory.
Friday: Propane prices started the day stronger, trying to reverse Thursday’s losses, but ended up posting their third straight day of losses and crude posted its second. Another threat of cold weather should keep propane prices supported.
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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.
Market Information Services
The Propane Price Insider, an e-mail service that provides:
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Three Daily Price Flash Wires
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Periodic Option Quotes
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Wednesday Inventory Data Updates around 11 a.m. ET
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Evening Report with Executive Summary, Trader's/Hedger's Corner, Weather maps and complete review of energy prices that are based on Propane's Btu Equivalent
Free trial!
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.
We offer:
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Detailed market recommendations on hedge and pre-buy entry points
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Prompt market execution of hedging strategies
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Supply cost analysis and recommendation as to effective hedging strategies
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Because of the volume of transactions we place annually, we receive large volume consideration when we place your hedges
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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