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Trader's Corner

This week’s Trader’s Corner looks at low natural gas inventory and the implications for propane production.

Last week in Trader’s Corner, we viewed the chart below concerning the slowdown last year in natural gas production.

Though still growing, the rate of growth in natural gas production slowed dramatically between 2012 and 2013. Even though that did not result in lower propane production in 2013, eventual lower rates of growth in natural gas production will slow the rapid expansion of propane supplies.

However, current natural gas inventory levels lend themselves to a potential uptick in natural gas production this year.

Like propane inventory, natural gas inventory has fallen sharply this year because of the severe winter. In fact, the inventory level has gone below 1,000 Bcf, which is a minimum the industry prefers to build from to be ready for next winter.

However, that minimum was set when the industry had far less capability to replenish inventory. One need only look at natural gas prices, now around $4.328 per mmBtu, to know there isn’t much worry about inventory being more than adequate by the start of next winter.

The production light for natural gas should be fully green this summer as producers work to replenish inventory, and that is good news for propane supplies. The more natural gas produced the more propane produced. That will give us a much better chance to build propane inventory while meeting strong petrochemical demand and the potential for high exports.

But the need to build natural gas inventory is not the only reason one might expect a renewed emphasis on natural gas production. The recent developments in the Ukraine may also drive the U.S. government toward fast-tracking more liquefied natural gas exports.

Europe is in a frenzy, looking for ways to diversify its energy sources. Europe has become highly dependent on Russian crude and especially natural gas. Europe is wanting to punish Russia for taking over the Crimea region of Ukraine, but it is hard to get tough on Russia when it is so dependent on it for energy.

As Europe seeks diversification, it is looking toward the rapid expansion of natural gas in the U.S. Many Europeans are asking if they can get more supply from the U.S. It certainly wouldn’t be a cheap option compared to the pipeline-delivered supply from Russia. Nonetheless, the need to diversify its supplier base has been made evident by this recent crisis.

The U.S. government is highly motivated to find ways to threaten Russia and keep it from taking control of these old Soviet countries. It has implemented sanctions against individuals in Russia and the Ukraine who had a big part in making Crimea a subject of the Russian Federation. But that is hardly much concern for Russia; its president has already said he will take care of those affected by U.S. sanctions.

The U.S. is considering broader sanctions that could be placed on broader business sectors, such as energy. However, nothing could be more threatening to Russia than seeing the flow of gas to Europe slowing.

Russia provides about a third of Europe’s crude, coal and natural gas, providing it $250 billion in return. Europe would be more than happy not to supply that much revenue to a country that is showing aggression in Europe. It is the same dilemma the U.S. has faced for years because of its energy dependence on potential enemies. Nothing hurts worse than sending your military against a foe your own money helped arm.

Both the U.S. and European leaders would be glad to see that happen as soon as possible, as they have been unable to find any meaningful response to Russia’s aggression.

That inability appears an open invitation for Russia to orchestrate the takeover of some other region. The West is desperate to find out something that Russia fears, and the abundance of U.S. natural gas could play a role in that endeavor.

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
Propane inventory reports were little support, allowing prices to continue to fall. Crude got enough support from the uncertainty in the Ukraine to post a modest gain for the week.

Propane firmed up on Friday, but we go into the week with a bearish outlook simply because propane seems determined to trade under a dollar. Overall we think propane is oversold for current conditions, but apparently most market participants don’t agree.

Monday: No turn in propane prices to start the new week as prices at both hubs fell sharply. Crude fell as worries about a possible military conflict between Russia and the West over Ukraine subsided.

Tuesday: Propane prices firmed up a bit ahead of weekly inventory data due on Wednesday. Crude rebounded as a break in technical resistance brought in more buyers.

Wednesday: The U.S. Energy Information Administration reported a small build in propane inventory, sending prices down. Most of the build came in Gulf Coast inventory, sending Mont Belvieu down 1 3/4 cents. There was a small draw in Midwest inventory, helping prices there resist the fall. West Texas Intermediate crude shook off a 5.85-million-barrel build in U.S. inventory to post a gain.

Thursday: Like the previous week, Conway propane could not use the Midwest inventory draw to mount a rally. Prices dipped a penny and a half as traders showed little concern for the current tight inventory conditions.

Friday: Propane opened the day down sharply, with Conway falling below a dollar, but prices firmed up through midmorning.

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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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