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DIGITAL EDITION
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THIS WEEK'S TOPIC:
NATURAL GAS PRODUCTION
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A look at natural gas production and its importance to propane
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More than 70 percent of U.S. propane comes from natural gas processing. All of the changes in the U.S. natural gas liquids (NGL) industry are the result of the rapid growth in natural gas production.
These changes dramatically reshaped the dynamic of propane supply and pricing for many reasons. As recently as 2009, the United States was a net importer of propane. That year, the United States imported 46 million barrels of propane and exported 31 million barrels of propane.
In 2013, the United States imported 37 million barrels of propane and exported 110 million barrels. The import/export trends continued into this year, with export volumes steadily increasing. That trend should continue, with major expansion in export capability expected next year.
All the new natural gas production has been both a blessing and a curse for U.S. propane retailers. On the one hand, it has made propane a much cheaper Btu - for the most part - over the past few years. Propane’s value went from being an average of 75 percent of crude to around 30 percent of crude, as propane supplies exploded and options to deal with it were limited.
But the expansion of NGL production also created problems for dealing with massive quantities of ethane and natural gas liquids other than propane. As a result, important pipeline assets once dedicated to propane and vital to getting propane to retail markets changed to other services.
Drilling for natural gas and the rapid increase in natural gas production has been, and continues to be, the engine that has driven these head-spinning changes to our industry. What’s amazing about this revolution - or evolution - has been that natural gas production, and thus propane production, has continued to increase, despite the rapid decline in natural gas prices.
The chart above shows natural gas production since 2006. It has been on an upward trend from through this year.
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The chart above shows the price of natural gas in dollars per million cubic feet during the same time. As the shale gas revolution took hold, natural gas prices plummeted from around $13.75/mmBtu in 2008 to less than $2/mmBtu in 2012. One would certainly think that such a collapse in prices would have ended natural gas drilling, but as the top chart shows, the uptrend in production was barely altered.
The harsh winter of 2013-14 used up a lot of built-up natural gas inventory that had driven natural gas prices to the sub-$2 range. In fact, prices more than doubled during that winter. But as the inventories have been replenished, prices are beginning to fall, even as we move toward the winter months.
Natural gas inventory is now at 3,393 billion cubic feet, just 336 billion cubic feet below this time last year. Inventory is now just 9.1 percent below its five-year-average and growing rapidly, and inventory grew to 94 billion cubic feet last week.
The million-dollar question for those of us in this industry is: At what point will natural gas production decline? Interestingly enough, it has been the relatively high value of ethane and heavier NGL (including propane) that have offset the fall in methane prices and justified continued drilling and production expansion.
The high relative value of international propane prices has been a key reason that natural gas production and resulting propane production have continued to grow. But in October, international propane prices began to collapse, and so did the price of U.S. propane.
As we said last week, the assumption has been that the United States would have a market for all the propane it had the capacity to export. But as the weak global economy struggles to absorb all this new production, propane’s relative value is declining, and it is doing so at a more rapid pace than sharply falling crude.
Will the weak global economy finally end the expansion of U.S. natural gas production and with it the rapid expansion of propane production? Will Organization of the Petroleum Exporting Countries’ (OPEC) determination to not lower its crude production and thus hold on to market share continue to undermine the value of global crude prices? And if so, will NGL prices that are based off crude prices fall enough to end the justification of expanding natural gas production, as long as it is NGL-rich?
At this point, there is a greatly increased chance the answer to those questions is yes. A major factor in whether that is true may be the fate of the natural gas export market. It has been our interpretation so far that the expansion of compressed natural gas exports has been much slower than expected.
The natural gas industry dodged a bullet when it got help from a very harsh winter last year, but will it happen again? No one knows. But what we do know: It is critical that we keep a close eye out for a break in the long-running uptrend in natural gas production. A break in that trend could set us on a course for tighter propane supplies and higher prices.
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FROM OUR PARTNER
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WEEK IN REVIEW
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Crude could not rally last week despite numerous supportive news items, such as more crude consumption by China and better economic data from China and Europe. Propane was very weak to start the week, but trimmed the losses a little the past two days. Crop drying is kicking in, so we will start the week bullish on Conway. But a drop-off in exports still has us neutral on Mont Belvieu.
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LAST WEEK'S HIGHLIGHTS
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Propane prices tumbled to new lows for the year on light trading volume. Crude managed a small gain on reports that Saudi Arabia exported less crude in August as it moved to store more of its production.
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Trading for propane dramatically picked up from Monday, but prices fell sharply. The increased volume and lower prices showed aggressive sellers. Crude inched higher on reports of increased crude demand from China.
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The Energy Information Administration reported a build in U.S. propane inventory in a week that normally produces a draw on inventory. That report sent propane prices down sharply. Midwest propane inventory had a slight draw, which limited the downside for Conway, but Mont Belvieu had no such support and lost 3.45 percent of its value. Crude fell on a 7.1-million-barrel build in crude inventory.
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Crop drying demand seemed to be putting a floor under propane, with both hubs outgaining rebounding crude. Positive economic data from China and the Eurozone helped give crude a boost.
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Propane prices dipped early, but rallied by midday. There were reports of strong crop drying demand in support of propane markets. Conway out-month prices were not going up as fast, however, as the current demand was taking some of the pressure off storage values for barrels later this winter. Mont Belvieu was struggling to keep up with Conway, with export volumes reduced.
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CONNECT
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WHAT IS COST MANAGEMENT SOLUTIONS?
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The Propane Price Insider is an e-mail service that provides:
- Three daily price Flash Wires
- Periodic option quotes
- Wednesday inventory data updates around 11 a.m. ET
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Evening report with executive summary, weather maps and complete review of energy prices that are based on propane's Btu equivalent
For a free 10-day trial subscription by e-mail, sign up online here or call 888-441-3338.
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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.
Contact us today to see if you can benefit from having the Energy Price Watchdog working for you.
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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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