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Trader's Corner

This week’s Trader’s Corner looks at a value-changing propane inventory build. But we also discuss why you may not want to get too bearish about next winter's prices this early in the game.

This past week, the Energy Information Administration (EIA) reported a massive build in U.S. propane inventory. As the chart below shows, the build was about three times the average weekly change for the summer inventory build period.

On average, over the past five years U.S. propane inventory has increased 1.2 million barrels per week between now and the first of October. This past week’s build was an astonishing 3.7 million barrels. It followed another above-average build of slightly more than 2 million barrels.

It was truly a game-changing event concerning inventory positions.

In March, propane inventory was at a five-year low. Inventories were improving during most of April, but the past two builds have put inventory positions in a whole new light. Propane traders seemed to be fairly confident that propane inventories were going to build at a rapid pace this summer, causing propane to remain relatively low valued despite inventory positions coming out of winter that suggested a possible undervalued situation.

Propane had settled in at a 45 percent value relationship to West Texas Intermediate (WTI) crude. In other words, a barrel of propane was trading at 45 percent of the value of a barrel of WTI crude. Since these two large inventory builds over the past two weeks, we have seen propane’s relative value to WTI crude drop to 43 percent and to 44 percent, respectively.

In general, this time of year propane prices are going to follow crude. For the most part, during the latter half of April propane prices declined because crude was in a downtrend. Propane was simply maintaining the 45 percent value relationship that traders appeared to deem fair under the current conditions.

Propane is likely to still be influenced by crude’s price direction, but now it appears it will maintain a 43 percent to 44 percent relative value because of the improvement in inventory levels. Numerous folks asked us why propane prices did not fall more after such a large inventory build. One factor has been that WTI crude has started a price uptrend over the past six days.

Literally propane can fall in relative value without its price moving at all. In fact, propane falling as crude prices rise actually makes the price pull back since the inventory builds feel even more bearish. If inventory builds continue at the pace of the past two weeks, we would expect propane’s relative value to ratchet down even more.

Interestingly though, the build was not a result of a new influx of propane production as most believed would be the cause of a rise in the rate of inventory builds. Propane production has actually declined over the past couple of weeks from 1.495 million barrels per day (bpd) to 1.470 million bpd.

Instead, the key contributor to the inventory build has been a sharp fall in propane demand.

Last week, propane demand dropped near a five-year low for week 18 of the year. As the chart shows, the next couple of months are usually low for propane demand. Nonetheless, this past week was well below normal.

In trying to get our arms around the sharp drop in demand, we had a conversation with one of our clients. He offered a couple of interesting observations that I thought were legitimate considerations for the sharp drop in demand.

First, he suggested that propane retailers are simply exhausted from a long winter and trying to get customers caught up on tank levels after falling behind this winter.

Second, he suggested that there is a lot of uncertainty concerning supply contracts with physical suppliers this year. Most retailers are trying to figure out what, if any, changes will be made with physical supply contracts after this past year’s challenges. Many, of course, are trying to make sure they are buying their supply on an index basis after suffering through huge blowouts in the price spread between the hubs and many supply locations. The bottom line from his view is there is more of a preoccupation with physical supply at the moment and perhaps a later time frame for getting physical supply contracts nailed down. He thinks that could be contributing to the current lag in demand. His view is certainly backed up by numerous other conversations we have had with retailers.

If the large builds in inventory could have been directly attributed to a large increase from the supply side, then we would be a lot more confident the large inventory builds of the past two weeks would continue.

However, since the builds are more attributed to the demand side, we are not so sure. We know that petrochemicals are already consuming considerably less propane than they were this time last year, but that was already occurring before the past couple of weeks. Also, industry reports show propane exports remain at a high. Therefore, we must conclude that much of the most recent demand destruction has come from the retail/commercial sector.

If that is the case, we could see inventory builds that are far less robust in the coming weeks as propane retailers recover from an exhausting winter and get supply contracts put to bed. We will need to keep a close eye on how this plays out, but we might be a little cautious on dumping too much of our supply length for next winter. We have had numerous retailers react to the inventory builds by closing down some of their swap positions they had already bought for next winter. If retailers had been very aggressive and bought a lot for next winter, that might not be a bad play. But be a little cautious of getting too bearish at this point and dumping all of your winter hedges.

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
A big build in propane inventory kept the downtrend in price intact. Crude managed to develop an uptrend through much of the week, but nearly gave it all back late Friday. We will stay bearish to start the week.

Monday: Propane retreated as last week’s above-average inventory build continued to affect prices. Crude fell on more disappointing readings on China’s manufacturing sector.

Tuesday: Propane was mixed with Mont Belvieu continuing to slide, while Conway prices posted a half-cent gain. Crude remained volatile, but continued to work on developing an upward price trend.

Wednesday: A very large 3.7-million-barrel build in U.S. propane inventory sent propane prices lower despite a rally in crude. Crude was higher on a draw in U.S. crude stocks.

Thursday: Propane prices continued to fall on the back of the propane inventory build and due to falling crude. Crude traders were taking profits on Wednesday’s gain.

Friday: Crude had a very strong morning and an equally weak afternoon to close slightly lower on the day. Propane prices were still heavily influenced by building propane inventory and continued to navigate their way toward the year’s lows.

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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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