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Click here for a free, 10-day trial of The Propane Price Insider!
Dear Propane Price Insider readers: On Oct. 6, your PPI newsletter is getting a makeover. In addition to a fresh redesign, the newsletter is undergoing a name change. It will be called Trader's Corner. The new name will reflect the strategic role that propane marketers play – deciding when to buy and sell their supply in order to protect customers in a volatile energy market and maximize business profits. Please be on the lookout for this name change in your inbox so you won't miss this valuable weekly propane market report.
Trader's Corner
This week’s Trader’s Corner looks at how propane’s value to crude is running this year.
Despite high inventories compared with last year, U.S. propane prices are at a higher relative value to crude than last year. What does that mean exactly?
We monitor the relative value of propane to West Texas Intermediate (WTI) crude. It’s a way of determining if our Btu (propane) is relatively expensive or cheap. It’s a simple calculation; we divide the value of propane by the value of crude to get a percentage value or percentage relationship.
The two charts above (one for Conway, one for Mont Belvieu) plot the relative value of propane to WTI crude.
When the new propane production started coming online, and there was not nearly enough domestic demand or export capacity to handle it, the relative value of propane declined to historic lows. Those historic lows were still being set through part of 2013.
In Conway, the relative value improved through the summer of 2013 (see the blue line in the bottom chart) as new options of taking natural gas liquids straight to the Gulf Coast for fractionation and storage became available. In fact as we all know, after the supply shortage in the Midwest last winter, the efficiency of moving barrels out of the Midwest caused inventory to start last winter well below average.
In 2013 (see the blue line in the top chart), Mont Belvieu’s price relative to crude did not start improving until winter demand began to draw down inventory. Values at both hubs were running near the five-year average by the end of 2013.
Then, the relative value spiked at the beginning of 2014 as winter demand stressed supplies. Propane was in high demand and in short supply, especially in the Midwest. Suddenly, propane had a relatively high-priced Btu. Fundamentals had dislodged propane from its normal relationship to crude.
It is understandable why propane’s relative value spiked in the supply/demand environment at the beginning of the year. When the demand subsided, the relative value quickly returned to below the five-year average. But it never returned to where it was before last winter. That is understandable because inventory was low coming out of winter.
What has been difficult for many to accept is why propane’s relative value has been increasing more recently, even with inventory in much better shape than it was in 2013. Logically, it would seem propane prices should fall below where they were in 2013 if propane inventory is higher than it was at this point in 2013.
Conway inventory still is not as high as everyone would like it to be at the start of winter, so a relative value that is near the five-year average doesn’t seem too out of line. It’s the value of Mont Belvieu propane that has many retailers dumbfounded. With each above-average inventory build, the expectation is Mont Belvieu propane prices should fall. After all, Gulf Coast inventory is now 119 percent of the five-year average and 112 percent above where it was at this time during 2013. Yet, Mont Belvieu propane is running at 45 percent of WTI crude when it was at 41 percent on lower inventory in 2013. The math just doesn’t seem to work. Prices should be lower if inventory is higher, or so the expectation goes.
Part of the answer to the conundrum is psychological. Frankly, when propane was getting priced in the 35 percent range to WTI crude a couple of years ago, it seemed absurd to many. Then, this past winter, Conway went to 199 percent of crude and Mont Belvieu went to 72 percent of WTI crude. In that recent historical light, even the 45 percent relationship of today seems a little absurd.
But valuation has to be based on more than psychology, doesn’t it? A technical trader (one who follows charts) believes that the market is 80 percent psychologically driven. So a technical trader would see the higher valuation this year as very logical.
Fundamental traders believe the market (price) is 80 percent driven by fundamental factors, such as inventory. So for fundamental traders, the current prices seem less logical. Most of us in the propane business tend to be fundamental traders, although the army of technical traders is growing.
Whether you are a technician or a fundamentalist, there is still some fundamental basis for propane prices resisting going lower than last year, despite the higher inventory position. The fundamental reason is because of all the new export capacity that started coming on just recently and will continue to grow through 2015 and beyond. U.S. waterborne export capacity will be about double by the end of next year.
During most of this year, we operated with about 13.5 million barrels per month of Gulf Coast export capacity. By the end of next year, that capacity is projected to be around 24 million barrels per month. And that doesn’t even take into consideration the increased export capacity on the East Coast that will further reduce the potential to build inventory on the Gulf Coast next year.
The point is that there are fundamental factors at play that are not currently showing up each week in the data the Energy Information Administration releases. In fact, buying propane for farther out (next year) probably is helping prop up the relative of value of propane in the current month.
Is it possible, in light of rapidly building inventory, that propane sellers eventually will cry uncle and allow prices to go lower this winter despite their expectations about the future impact of exports? Absolutely. In fact, that is what makes getting into the proper inventory position for this winter so challenging for propane retailers. It is also one of the reasons we are making sure everyone we speak with considers buying options on propane rather than actually owning it for this winter.
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 continued higher in the front half of the week, then dipped midweek following an above-average inventory build and a sharp drop in crude. Both propane and crude rallied on Friday.
From a technical trading perspective, WTI crude is still susceptible to the continuation of a downtrend that began in June, despite its strong rebound on Friday. Propane’s direction will be influenced by crude and this week’s inventory data. We are neutral to start the week.
LAST WEEK'S DAILY HIGHLIGHTS
Monday: Propane prices continued higher with strong trading volume in Mont Belvieu once again. WTI crude was higher and Brent lower as crude traders made spread plays on the two benchmarks, buying WTI and selling Brent.
Tuesday: A report by the International Energy Agency showing the world well supplied with crude sent crude prices lower. Propane drifted down, with the fall in crude taking some of the steam out the rally in propane prices.
Wednesday: The Energy Information Administration reported an above-average build in U.S. propane inventory of 1.8 million barrels, sending propane prices lower. The sale of several Nigerian crude cargoes helped lift crude, even though U.S. crude inventory built against an expected draw.
Thursday: Propane prices were dragged lower by a 2 percent fall in crude. WTI crude dropped on technical trading after failing to break above technical resistance.
Friday: Crude recovered from its losses on Thursday, with reports that Ukraine had attacked a Russian armored column that had crossed the border into Ukraine. Propane was pulled higher by rallying crude.
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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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