Propane Price Insider
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Trader's Corner

This week’s Trader’s Corner looks at the risk and reward for buying propane now.

If we had a dollar for every time someone asked us, “Are we at the lowest price of the year?” or some similar iteration of that statement, we would own a tropical island and our most difficult decision would be figuring out when to take our massage.

Even if we knew the answer to that question and answered it affirmatively, “Yes, today will be the lowest price of the year,” we suspect 80 percent of the people who asked the question wouldn’t act upon the knowledge. What we would hear, more times than not, would be, “OK, let’s watch it another day and see.”

They wouldn’t call back because prices are no longer at the lowest point of the year. They would wait with the intention of buying when prices returned to the lowest point of the year. But even if prices returned to that point, they would not likely execute a trade because they would assume prices could go even lower.

We can make the following statement with a strong amount of conviction: If you are waiting for the lowest price of the year to buy, you will almost always miss it. You are asking to know the unknowable and you will not have the knowledge you seek until the opportunity has long passed.

We must ask ourselves why we need to know the lowest price. More times than not it is because we fear our competition. We fear they will own a lower price than us and beat us over the head with it all year.

We strongly believe that if we are competitor focused, our actions will almost always move us closer to what we fear. A retailer who is competitor focused is seldom customer focused as well. While we are worried about our competitor, our competitor is worried about his customers.

Eventually he will own our customers, because he is figuring out what customers want and he is being proactive delivering it. Sure enough, he will own what we don’t and it won’t be the lowest price of the year; it will be a good relationship with our former customers.

Instead of focusing on the lowest price of the year, try to shift your thinking to the sales side and what number you feel will work in your market next year. It is a number that likely would be palatable to your customers or would be a price you could use to push certain programs you have developed on the marketing side. When you see that number, buy it.

If you take this approach, consider your downside risk of owning that number. Let’s look at where that might be right now. Our analysis is going to focus on Mont Belvieu, but it would be similar for Conway.

On Thursday, 30 crude analysts projected that West Texas Intermediate (WTI) crude would trade at an average of $96.60 this year. Currently propane is trading around 43 to 44 percent of WTI crude.

The chart above shows that Mont Belvieu propane is trading just above where it was this time last year relative to WTI crude.

But as the next chart shows, the inventory position is in much worse shape now than it was at this point last year. That reduces the odds of a sharp drop in valuations from here. There is a good chance the low relationship experienced last summer might not occur, especially if inventories don’t build as fast as expected.

We will admit that propane’s value to crude is already far below what we were expecting as a low relationship this year. That makes it feel like a good buy opportunity. But, what if we are wrong? Let’s take a look.

Using the $96.60 crude forecast and 35 percent of WTI crude, propane would be at 80.50 cents. If you look at the first chart, you will see that 35 percent of WTI would be lower than anything experienced from this point forward last year. Given current conditions, we think it is reasonable to expect that to be the worst case this year.

So even if a buy here is totally wrong, it can only miss by 23 cents. So if you were taking a 35 percent stake in next winter supply, you would still have the opportunity to average down and remain competitive.

If you do take a position for next winter, how much potential upside are you taking off the table? Mont Belvieu hit 169.5 cents at one point last winter, so if you have no supply position, the potential upside risk is far greater than the downside risk.

If we are truthful, if propane fell to 80.5 cents in Mont Belvieu, street prices are unlikely to fall the full 23.5 cents. We have a tendency to hold our street price up in a weak price market. So in reality, our downside risk probably is not the full 23 cents. We would bet that retail prices would only fall 10 to 15 cents if Mont Belvieu fell to 23.5 cents from here.

The point is that we don’t have to know the bottom to make sound buys. There is still time to move and adjust our position as the summer progresses. We suspect buys here will work in your market next winter no matter how pricing goes from here. Currently you can own the winter for about 110 cents. In the current winter (2013-14), the average price has been 125 cents.

Could there be lower prices this summer? Most assuredly. However, is it just as likely that positions taken now will be competitive and allow you to make a good margin next winter? We think so, and it immediately begins to take away the upside price risk for your customers, which is really unlimited.

More importantly, taking an opening position on next winter supply at this point should make you a more aggressive marketer. We have a feeling if you were building programs around a 110-cent Mont Belvieu price for this coming winter, many customers would jump at it. If you are able to lock down sales against whatever position you take, you eliminate risk altogether.

Our advice is to eliminate the concept of buying at the lowest price. Instead, look for opportunities to own a price you believe will work in your marketplace next winter and buy it. After that, be an aggressive seller of that gas.

By owning 35 percent of your winter needs now, there is plenty of opportunity to cost-average down should prices move lower this summer. Yet, if prices go up from here, what you own at this price will help average the higher costs down and keep you competitive.

When you buy opportunity, like the current pullback has provided, you are more likely to actually own the lowest price of the year than the guy who is searching for the bottom. While he is searching for the bottom, you will be providing what customers really want – a fair price that removes the risk of a budget-busting spike next winter.

Focus on your customers and buying to deliver on the product offerings they want. If you do, we believe you will own the lowest price of the year far more times than you ever did when you focused on your competitor.

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 prices were finally showing signs they could turn higher. Sellers appeared much less aggressive in pushing their barrels. It looks like the focus is starting to shift to next winter and the 41 million barrels that need to build for us to reach average levels to start the next heating season.

Monday: Propane fell on news the Houston Ship Channel had closed because of a collision over the weekend, potentially reducing propane exports. Crude was little changed as negative Chinese economic data offset disruptions to crude imports due to the Houston Ship Channel incident.

Tuesday: Mont Belvieu moved higher on word the Houston Ship Channel was preparing to partially open. Conway could not follow. Crude was lower on a volatile day of trade as investors weighed concerns about demand with threats to supply.

Wednesday: Propane prices firmed up after the U.S. Energy Information Administration reported a 0.583-million-barrel draw in U.S. propane inventory, which was about five times more than the average draw for week 12 of the year. Crude moved higher on more good U.S. economic news.

Thursday: Propane extended gains, with the inventory draw reported on Wednesday supporting higher prices. More positive U.S. economic data and renewed concerns that Russian energy supplies could be disrupted by western sanctions had crude up.

Friday: Propane continued trying to develop a fledgling uptrend as the focus appeared to turn to next winter and the challenges of building inventory. Crude was up as supply worries more than offset demand-destruction concerns.

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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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Dale G. Delay 888-441-3338,
Mark Rachal 888-441-3338,

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