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October cover


A look at the fall of international propane prices and how it affected U.S. prices
Cost Management Solutions    
Cost Management Solutions
In last week’s Trader’s Corner, we discussed why propane prices that had held up against record inventory conditions suddenly fell. Part of the reason was the fall in international propane prices. This week, we are going to take a closer look at that fall and the immediate impact it had on the value of U.S. propane prices.

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The chart above shows a recent history of West Texas Intermediate (WTI) crude, and Mont Belvieu and Conway propane prices. Propane prices were rising during the first week of October, despite falling crude. But then prices tumbled on Oct. 9.

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The bar chart above shows the price of propane at five locations: Far East, Saudi Arabia, Northwest Europe, Conway and Mont Belvieu.

Before we move on, a couple of notes about those locations. We all know Conway and Mont Belvieu are supply points for propane. Of course, Mont Belvieu is the location where U.S. exports take place.

Saudi contract price also is a supply point price. The Saudi contract prices are a benchmark that deals price in relation to propane around the world. Just like crude benchmarks, where deals are done at Brent or WTI plus a certain differential, the same is true for propane deals against Saudi contract prices.


That leaves the Far East and northwest Europe as import points. Obviously, these are not the only import markets in the world. In fact, most U.S. exports go to the Caribbean, Mexico and South America. Still, propane based off of Mont Belvieu and the Middle East Saudi contract price is trying to supply these markets.

Throughout the summer, global propane prices had held up well. With the U.S. exporting more and more propane, international pricing is becoming a greater determinant of U.S. prices. High international propane prices allowed U.S. prices to remain high, despite growing U.S. propane inventory.

As we said last week, the assumption had been the world was net short of propane and the U.S. could export up to its full capacity. However, a stubbornly weak global economy - especially in Europe and Asia - has reduced the need for energy, including propane, all the way around. That shed doubt on the assumption that the U.S. will be able to fully utilize all the new propane export capacity it is building.

On Oct. 9, international propane prices that had held up so well over the summer suddenly tumbled. Over three days, the Saudi contract price fell from $1.43 per gallon to $1.25 per gallon. As both charts show, the U.S. price of propane began to fall in response.

In fact, once international support for U.S. propane broke and U.S. propane was left to trade on its own fundamentals, the price of U.S. propane continued to correct, even when international prices rebounded a bit. Volatility remains, but over the past few days, international prices are getting more stable and so is the U.S. market. Nevertheless, the relative value of propane ratcheted down a notch.

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The chart above shows propane’s value relative to WTI crude. It is a simple percentage comparison. In the chart, the red line is the relative value of Mont Belvieu propane to WTI crude for this year. Note how it fell sharply when the pullback in international prices occurred.

Now let’s compare this year’s relative value with last year’s relative value (the blue line). Note how propane was a relatively more expensive Btu this year than last over the summer, despite record-high inventory. U.S. propane prices were able to trade at a higher relative value because of the expectation that higher exports would eventually dry up excess supply.

But once the assumption that the United States could export all it wanted came into doubt, and the weak global economy caused international propane prices to drop, the relative value of propane corrected. Note that the relative value of Mont Belvieu propane is now equal to what it was this time last year, with the latest correction appearing complete.

Of course, propane prices could continue to drop lower from here and find an even lower relative value to crude. Current inventory levels would be a reason for that to occur, but the adjustment that has already been made reduces downside price risk.


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The energy complex remained weak. Another above-average build in U.S. propane inventory kept the pressure on prices. Weak fundamentals continued to dominate crude, sending it lower. Advances by the Islamic State in Iraq helped encourage the speculative buying of crude the last two days of the week. We are now neutral in our outlook for propane and remain bearish on crude.

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Last Week's Highlights
Conway moved higher and Mont Belvieu lower, in an active trading day to start the week. In private meetings, Saudi Arabia let others know the market needed to be prepared for lower crude prices and that resulted in slightly lower crude prices.
Crude and propane prices fell sharply. Crude fell after the International Energy Agency lowered its expected growth in global crude demand for this year and next. Meanwhile, Organization of the Petroleum Exporting Countries (OPEC) is giving every indication it will not cut back on production at its November meeting.
Propane became very volatile, as traders had to wait an extra day for the holiday-delayed Weekly Petroleum Status Report from the Energy Information Administration (EIA). Both hubs eased up slightly, with good trading volume in Conway helping it outpace Mont Belvieu on the day.
The EIA reported a 731,000-barrel build in U.S. propane inventory that was in line with industry expectations. Week 41 of the year has seen a small 90,000-barrel-draw on inventory over the past five years. A very large build in crude inventory did not keep crude from bouncing. More softness in international propane prices kept pressure on U.S. propane prices, limiting Mont Belvieu to a small gain and Conway to a slight loss.
It was an extremely volatile day for propane, with prices bouncing all over the place throughout the day. Crude surged higher in the morning, but was struggling to hold on to any of the gain by the end of the day.

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