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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 looks at U.S. crude.
As we all know, crude is an important factor in determining the price a propane retailer will pay for supply. So it is important for us to understand what is going on in the world of crude. Crude and propane prices separate at times, but there is a long-term relationship that can’t be ignored.
We put the above chart out daily to help our readers follow the relationship between crude and propane (click chart to enlarge). Note that from mid-April, crude prices were falling primarily due to building U.S. crude inventory. Propane went down with crude. Fundamentally, there were not many reasons for propane prices to go down at the time because propane inventory was well below normal and inventory builds were running below average.
However, at the beginning of May, crude began to rally. Crude inventory was still high, so there wasn’t a fundamental reason for West Texas Intermediate (WTI) crude prices to move higher. Note how crude rallied on Wednesday, with a surprising 7-million-barrel draw. Propane followed it higher, despite a propane inventory build that was above expectations. The influence of crude was obvious on Wednesday.
As the inventory chart shows, U.S. crude inventory was at a five-year high at the beginning of May, yet prices went higher (click chart to enlarge). Other than fundamentals like inventory, crude can be driven by economics and more often these days, geopolitical events.
Any uncertainty around the world that threatens crude supplies can cause crude prices to go higher. That is what happened in May as the situation in the Ukraine unfolded and the U.S. and Europe accused Russia of meddling in Ukrainian affairs for its own gain. The situation in the Ukraine suddenly became a threat to Russia’s massive oil and gas exports.
However, even as crude rallied on the geopolitical events earlier this month, propane continued lower. The reason is that propane inventory had begun to build at an above-average pace. The inventory builds kept propane prices moving lower, even as crude rallied.
The result was a change in the valuation between propane and WTI crude.
The chart above shows the percentage that a barrel of Mont Belvieu propane is to a barrel of WTI crude (click chart to enlarge). Note that the red line for this year dropped to a five-year low point, essentially matching where it was this time last year.
When propane becomes a relatively cheap Btu, buying pressure builds. Propane had settled into about a 45 percent relationship to WTI crude since winter. Continuing lower after crude began its rebound dropped the relationship to near 40 percent.
A lot of folks had become interested in buying propane. Such low valuation and rising crude, as well as a 12 percent drop in prices since mid-April, were causing buying pressure to build. All it took was a sign of prices turning to draw buyers. That is why propane was able to post gains in value, even though fundamentals (inventory builds) provided no reason for that to happen.
We can’t just look at inventory as guidance for propane prices. The trend in crude, relative values and many other factors come into play. Some of it is simply the psychology of the market. Many retailers look at current prices and relative valuation against history, and they consider things like the improving economy and wonder just how much downside price risk is present.
While they know prices could go lower, current conditions suggest the odds of buys made here will be competitive next winter. It all becomes risk management. What is the downside risk? If crude gets soft and falls to the mid-90s, and propane inventory continues to build, then propane could fall 20 cents to 25 cents. But at the same time, upside price risk could be substantially more. Last winter provides an immediate reminder of that fact.
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
Propane prices began to attract buying interest after getting cheap relative to WTI crude. Propane buyers were finding prices too good to pass up. Crude continued its rise mostly on geopolitical supports. We are bullish to start the week.
LAST WEEK'S DAILY HIGHLIGHTS
Monday: Propane prices moved higher on the day, aided by rising crude. WTI crude managed a 59-cent or 0.58 percent gain as tension between the U.S. and China heated up over spying allegations.
Tuesday: Propane prices at both major U.S. hubs moved higher, but it was Conway that stole the show with a 2.25-cent gain. The recent drop below a dollar a gallon brought in buyers, pushing prices higher.
Wednesday: U.S. propane prices continued on a developing uptrend, with a spike in crude prices providing key support. An above-average propane inventory build of 2.2 million barrels provided a headwind for propane prices.
Thursday: Propane prices continued to climb, even without rising crude in support. Volume was good and upward price pressure was present all day. Recent inventory changes have not been that supportive of prices.
Friday: Propane prices continued higher on Friday, as buying interest continued to flow into the market. Crude prices continued to firm as unrest in Libya and the summer driving season are main influencers supporting price.
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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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