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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 will continue filling a hedger’s toolbox.
Last week, we began filling a hedger’s toolbox with the tools that any retailer can use to manage supply-side price risk. Having a toolbox full of the right tools necessary to manage supply-side risk is essential for the success of a propane retailer in today’s high-priced, highly volatile marketplace.
Our goal with this series is to introduce these tools, tell you when to buy or sell them, explain how they are best used and reveal a few things about how each works.
We may not provide all you need to know to use a tool, but you will at least know the tool is there and what you can do with it. Later, we can help you use the tool and explain more fully how it operates. So the goal here is to fill your toolbox and let you know what “project” the tool can help you accomplish.
Last week’s tool was a financial swap and this week’s tool will be a financial swap; the difference will be in the action. Last week, we bought a swap. This week, we will sell a swap. It is a different tool, but the two certainly could be part of a set, as they often are used together.
Tool: Financial swap
Action: Sell
Sell when:
- You are concerned about falling prices
- To protect gains or minimize a loss on a swap buy or pre-buy position
- As a speculative tool when you believe propane is overvalued
Best used to:
- Unwind long positions that were taken to protect against higher prices when market conditions suggest that the new risk is primarily to lower prices
- Protect storage positions from falling prices
Other considerations:
- Positions settle against the monthly average at the trading hub (Mont Belvieu or Conway) for which it is held.
- The owner (seller) will receive the difference between the monthly average at the hub and the strike price if the monthly average is lower than the strike price.
- The owner (seller) will pay the difference between the monthly average at the hub and the strike price if the monthly average is higher than the strike price.
- Credit must be established with a counterparty; otherwise a margin deposit of 10 cents or more may be necessary to establish the position. A margin call is not a fee or expense; it is simply a deposit made to protect a counterparty from accounts receivable risk.
- Traders of swaps must have a CICI number from the government that is obtained online for a fee of $200.
- Rising prices hurt a swap sell position for the retailer.
For propane retailers, the idea that they can sell propane anytime they want is a bit foreign. Generally, we sell propane to our customers when they want to buy it.
But selling propane in our local market is not our only option. We can sell propane in the financial markets, which will give us the same effect as if we had sold it in our local market.
If we hold a propane position through a financial instrument such as a swap buy, or a traditional pre-buy from our supplier, or hold propane in our storage tanks, those positions are vulnerable to falling prices. So if you have ever thought, “I wish I didn’t own that,” … then you should have thought of a swap sell.
Let’s say you filled your storage to guard against higher prices that you believe could occur because of a heavy crop drying season. As crop drying season approaches, however, you are getting reports that weather conditions are such that crops are drying in the field and propane demand for crop drying is likely to be very light.
The gas in storage is protection from rising prices, but if prices fall, you are stuck trying to sell this high-priced gas into a lower market. You either have to hold your street price higher than market or cut into your margin to stay competitive.
If our bias is that prices are likely to continue to fall – making the storage position even more of a liability – we can sell a swap for the volume we have in storage over the period we plan to use the product out of the storage, to limit our losses.
Remember, most supply decisions by propane retailers revolve around protection from rising prices. But once we own those protections, we are now at risk to falling prices. If we believe the risk to falling prices has become greater than the risk to rising prices, we should consider capturing gains or limiting losses through the use of a swap sale.
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
Crude finally got headline news, allowing it to end its three-week downtrend that had seen values drop 8 percent. Better-than-expected economic news from China and a large draw on U.S. crude stocks were key drivers for the rally. Geopolitical situations in the Middle East, Europe and North Africa that threaten supply also contributed to the rally.
Propane gains were limited by the continuation of above-average builds on inventory.
LAST WEEK'S DAILY HIGHLIGHTS
Monday: Crude was up, but not enough to break out of its downtrend. Propane was a little stronger than crude. Conway was a little stronger than Mont Belvieu, increasing its premium to Mont Belvieu to 2 5/8 cents. Tighter Midwest propane inventory played a factor in the increasing spread.
Tuesday: Crude fell sharply, posting a low of $99.01 on word of increased Libyan crude production. Propane did not follow the fall in crude and remained essentially flat on the day.
Wednesday: Another above-average U.S. propane inventory build of 3.215 million barrels for week 28 of the year allowed propane to resist a major jump in crude prices. A 7.5-million-barrel-draw in U.S. crude inventory and a better-than-expected improvement in China’s economy sent West Texas Intermediate (WTI) crude up sharply.
Thursday: Once again, propane stayed out of a major jump in crude. Crude carried forward buying momentum from Wednesday and got more support on reports that a Malaysian passenger jet carrying 297 crew and passengers was shot down over a rebel-occupied area of Ukraine.
Friday: There was little change in propane and crude prices to end the week. Crude was dealing with profit-taking after a strong two-day run. Trading volume in Mont Belvieu remained strong, but it has not pushed prices. It looks as if propane buyers and sellers are fairly comfortable at current price levels. Conway moved up, expanding its premium to Mont Belvieu, but it was on very low volume.
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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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