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Trader's Corner

This week’s Trader’s Corner looks at the first above-average inventory build of the season and discusses its psychological significance.

On Wednesday, the Energy Information Administration (EIA) reported in its Weekly Petroleum Status Report that U.S. propane inventory had increased 2 million barrels for the week ending April 25. It was the first time since the inventory-building period began that inventory had risen at an above-average pace.

The build was probably more important from a psychological standpoint than for what it truly did for inventory positions. The psychological importance is that this week’s inventory activity meets expectations that had been heretofore challenged by below-average inventory builds. The below-average builds have provided propane price support. However, since the build, propane prices have been on the weaker side and are now approaching the lows that occurred at the end of October.

As the chart above shows, U.S. propane inventory needs to build at an above-average pace this summer to reach the 67.5 million barrels of inventory that has been the average to start winter over the past five years.

Even with last week’s above-average build in inventory of 2 million barrels, inventory still needs to increase by an average of 1.6 million barrels each week from now through September. That average build is about 280,000 barrels per week more than the five-year average build.

Last week’s above-average build was a huge relief and provided more confidence that inventories will indeed build adequately this summer. One week does not make a trend of course, but it is nonetheless an important first step. We immediately saw the significance of the build, with more downward pressure on propane prices, and that influence was carrying into the weekend.

Adding to the optimism concerning inventory is planned maintenance work on propane export docks in Houston that will curtail about 3 million barrels of propane exports. One would think there would be hefty builds in propane inventory during that period.

Further, petrochemicals are very light on their use of propane at 329,000 bpd during April. That compares with 499,000 bpd last April. That is the equivalent of a potential 1.2 million barrels of propane per week that could go to inventory.

As the total U.S. inventory chart above shows, there is still a long way to go before propane inventory is at a comfortable level by next winter. But with last week’s build, a trend line that will inch inventory ever closer to where it needs to be can be seen.

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Propane prices were lower, with crude and an above-average propane inventory build. We go into this next week bearish, however the situation in the Ukraine was deteriorating quickly heading into the weekend. That could have crude rallying on Monday, which could very well end the downtrend in propane prices.

Monday: Propane continued in its downtrend, following up Friday’s losses with more of the same. More sanctions by the United States on Russia due to its involvement in Ukrainian unrest helped support a small gain in crude.

Tuesday: Propane moved higher with crude, as lower prices began to entice buyers. An attack on Libya’s parliament, and more sanctions by the United States on companies helping Iran move its crude, added to crude’s price.

Wednesday: Propane prices fell after the EIA reported a 2 million barrel build in U.S. propane inventory—the first above-average build this year. Crude fell following a weak reading on U.S. gross domestic product for Q1 of just 0.1 percent.

Thursday: Propane continued to fall on the back of the propane inventory build and due to falling crude. A rise in initial jobless claims offset a nice rise in U.S. consumer spending to keep crude in its price downtrend.

Friday: Crude was gaining interest after the Ukrainian government took action to push pro-Russian separatists out of one of the towns they hold in Eastern Ukraine. Propane gained in early trade, but faded into the close.

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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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