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October cover


A look at the status of propane inventory and why prices tanked last week
Cost Management Solutions    
Cost Management Solutions
All summer, we monitored inventory positions and reported them to our daily readers each week. At the beginning of the summer, we used a bar chart to show the climb of propane inventory toward a specific goal. The goal was the five-year average inventory position at the first week of October, a point that is often considered the beginning of the winter season.

This past week, the Energy Information Administration (EIA) released its Weekly Petroleum Status Report for the week ending Oct. 3. The timeframe to meet the five-year inventory goal we set at the beginning is complete; it’s time to report the final numbers.

The charts will reveal that, for the most part, the inventory build far exceeded the goal. In fact, propane inventory reached more than 80 million barrels. Yet until last week, the market showed little response to the higher inventory as propane prices generally shrugged off a continuous string of above-average builds and falling crude prices to keep propane prices mostly in a 105-cent to 110-cent range. After looking at the inventory, we will consider why.

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During the first week of October, U.S. propane inventory reached 80.645 million barrels. That was 120 percent of the 67.475-million-barrel five-year average for the first week of October.

Inventory is 13.170 million barrels above the five-year average. It also built 1 million barrels during the week ending Oct. 3, which leads us to suspect inventory will likely go higher for a while longer. From an overall U.S. perspective, propane inventory is at record levels and in excellent shape to handle what is expected to be strong crop drying demand, with plenty left over to meet winter heating demand.

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The Gulf Coast is the region that has seen the most robust inventory builds and accounts for most of the above-average U.S. inventory position. Gulf Coast inventory stands at 43.223 million barrels - 10.808 million barrels above the 32.415-million-barrel five-year average. That has Gulf Coast inventory 133 percent above the five-year average.

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Regionally, Midwest inventory is in the weakest position, as it has only reached 102 percent of the five-year average of 27.538 million barrels. At 27.958 million barrels, inventory is just 420,000 barrels above the five-year average. But even here, the position is encouraging in that inventory is 3.617 million barrels higher than the 24.341 million barrels of inventory that were available at this point last year.

In summary, both total U.S. and regional propane inventory positions are in great shape to start this winter.

The journey to this level of inventory became transparent over the past couple of months, with consistent above-average builds on inventory. Yet, propane prices were able to hold firm. Then suddenly last week, propane prices tumbled. What changed?

To answer that question, we first have to understand that the focus of propane traders this summer had not been on the supply side of the supply/demand equation. Therefore, the rising inventory was largely ignored because it was considered a “temporary” condition. All summer, the focus had been on expectations for domestic demand and exports.

Export capacity from the United States is slated to nearly double from August 2014 to the end of next year. The assumption has been that the world would take all the propane the United States could export (more on that assumption later). The idea all summer had been, once this winter passes, the new export capacity would bring inventory down. But since most of that new capacity won’t be on line until after this winter, there remained a reliance on good domestic demand to “bridge” the time until the new export capacity is available.

Domestic demand primarily includes consumption by petrochemical companies and propane retailer customers. The assumption was that petrochemical demand would be reduced from last year because petrochemical companies prefer to increase the percentage of cheap ethane in the feedstock stream.

However, we are not sure the amount of decrease by petrochemical companies was completely anticipated. During August, petrochemical companies consumed 291,000 barrels per day (bpd) of propane compared with 470,000 bpd in August of last year, a drop of 179,000 bpd year-over-year. Propane has dropped from 29.2 percent to 17.9 percent of the feedstock stream, whereas ethane has increased from 56.4 percent to 65 percent of the feedstock stream.

That had sellers putting more emphasis on demand from propane retailer customers. The ace in the hole has been a record corn crop that will need to be dried. That corn crop is expected to be 14.4 billion bushels, which is bigger than last year’s 14 billion. Also, many are expecting the corn to be harvested with a moisture content of around 20 percent, so it needs to be dried to 15 percent before going into storage. Estimates say 12.6 million barrels of propane will need to be used for crop drying.

Further, propane demand for heat is expected to be strong again this winter season. However, a forecast hit the street last week that suggested a more mild winter than many are expecting. Although that may turn out to be untrue, it shed some doubt on winter propane demand.

Along with the worries that winter propane demand may not be as high as expected, propane producers/sellers also faced a late corn harvest. Many now expect crop drying demand to hit closer to the end of the month.

All of the above set the stage for the real reason propane prices fell last week. No matter what, the assumption has been the world will need all the propane we can export. That assumption also is in doubt now.

The global economy is not doing well, especially in Europe and Asia, two of the primary U.S. propane export markets. Propane prices in those markets tumbled last week, putting price pressure on U.S. propane. Much of the U.S. propane to be exported is contracted, so it will move at most any price. However, spot loading could come to a halt. For all of the new U.S. propane export capacity to be used, the global economy may need to improve. At present, that improvement seems a ways in coming.

In addition to all of the above, other considerations are at work concerning propane supply and cost. U.S. refiners do not plan to take as much of their capacity down this fall for maintenance as they normally do, which will put more propane on the market. Finally, there is the matter of sharply falling crude, which is unlikely to see a turnaround until the Organization of the Petroleum Exporting Countries (OPEC) announces a production cut. OPEC is not expected to meet until November to discuss its production quota.

The bottom line is that almost all of the assumptions propane sellers used that kept propane prices supported -- even as inventories increased -- had some doubt placed upon them last week. That leaves propane to trade on current realities instead of assumptions, at least until crop drying picks up.


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Propane prices tumbled as they were undermined by a sharp fall in global propane prices and a late start to crop drying. Crude continued to deal with very weak fundamental conditions. Both demand side and supply side news was bearish.

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Last Week's Highlights
The draw on Midwest inventory last week kept Conway propane inching higher, while Mont Belvieu slipped against the higher Gulf Coast inventory position. A fall in the dollar helped draw money to crude and other commodities.
Bad economic news from the Eurozone sent crude lower. A milder-than-expected winter weather forecast by helped put pressure on propane markets.
The EIA reported a million-barrel build in U.S. propane inventory. Also, global propane prices began to retreat, putting downward pressure on the U.S. market. A build in U.S. crude inventory and weak economic data from China sent crude lower.
Propane experienced a major sell-off, as global propane prices continued to tumble and U.S. corn drying demand remained delayed. Mont Belvieu set a new low for the year. Crude was once again setting a new low, as weak fundamentals dominated the trading landscape.
A lot of volatility for propane, but in the end, the result was another down day as markets softened. A sharp drop in global propane prices undermined the foundation for U.S. propane prices.

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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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