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November cover


A look at developments with petrochemical companies that could support propane prices
Cost Management Solutions    
Cost Management Solutions
Recent editions of Trader’s Corner mentioned the four legs of propane demand that support prices: petrochemicals, winter heating, crop drying and exports. This issue of Trader’s Corner will focus on petrochemical demand.

As we mentioned, it appeared domestic heating demand might be the last leg standing. Petrochemical companies had begged off propane, preferring cheaper ethane. Crop drying did not appear to be the inventory-busting event it was feared to be and exports were potentially threatened by a sharp drop in international propane prices.

However, there were indications last week of more interest by petrochemical companies for propane as a feedstock, both domestically and abroad. Industry reports said propane was the preferred feedstock in Europe. European petrochemical companies, we believe, do not have the same access to ethane as U.S. petrochemical companies. The industry is working on more ethane export capacity, but for now, it is lacking. If European petrochemical companies are indeed demanding more propane, U.S. propane exports could remain high. About 13 million barrels of propane per month were exported in the third quarter. An industry source who is well positioned to know sees no reason for exports to remain at that rate, despite the recent fall in international prices. International prices gained against U.S. markets this week, and could keep U.S. propane attractive for export.

Even though U.S. petrochemical companies have access to cheap ethane, propane prices seemed to have reached a point at which petrochemical companies like the economics. Even though ethane is 19.25 cents per gallon - obviously much cheaper than propane – petrochemical companies also are looking at yields and what values are on the back end of the plant for the products they sell. Propane now may be cheap enough to give the yields they need.

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During October, U.S. petrochemical companies used a lot less propane than they used over the two previous years. The chart above shows the dramatic decline in propane use by petrochemical companies as they moved to cheaper ethane and reduced capacity utilization since the middle of last year.

In October, they used 106,000 barrels per day (bpd) less propane than they used in October 2013, and 139,000 bpd less propane than they used in October 2012. From January to October last year, petrochemical companies consumed an average of 477,000 bpd of propane. During that same time this year, the average has been 311,000 bpd, or 166,000 bpd less. That’s somewhere in the neighborhood of 45 million barrels that have been available to the other demand areas or have gone into storage. Obviously, it has been a major factor for U.S. propane inventory building to record levels of more than 80 million barrels.

However, petrochemical companies used more propane between October and September - 292,000 bpd compared with 269,000 bpd. Propane accounted for a higher percentage of petrochemical companies’ overall feedstock stream during October than in September.

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A leading industry expert believes the upward trend continued in November and that petrochemicals will have consumed about 350,000 bpd this month.

That rate of consumption is still historically low. The news of more interest in propane by petrochemical companies abroad, however, is some of the more bullish news the industry has received recently.

As the winter heating demand ramps up, and if the petrochemical interest in propane continues to build, it could be enough to start chipping away at the record levels of inventory and end the surprising inventory builds. These developments increase the odds that a price floor for propane is near, if not already reached. There is no guarantee of that, as petrochemical companies can quickly change what they do. Nonetheless, for now it reduces downside price risk and should be factored into supply management decisions, whether a retailer is considering how to manage current long positions or taking advantage of current low prices to add length for this year or next year.


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Propane prices fell into the mid-to-low 70-percent range at the first of last week. The attractive number brought in buyers the last two days of the week, despite another surprising build in U.S. propane. The gains late in the week before last were not enough to erase the steep losses to start the week.

Crude managed to pull out a slight gain for the week. Speculative players were stepping into the market in anticipation that the Organization for the Petroleum Exporting Countries (OPEC) will be forced to make a production cut and announce it after its meeting this Thursday.

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Last Week's Highlights
Propane prices were lower to start the week, with the fallout of last week’s large inventory build still dominating propane market sentiment. Reports that Japan’s economy had slipped into a recession had crude lower.
Propane was trading at new lows for the year at both Conway and Mont Belvieu in a strong selloff before Wednesday’s inventory report. Traders were anticipating another bearish report from the Energy Information Administration (EIA).
The EIA shocked propane markets with another inventory build, albeit just 99,000 barrels. The jolt sent propane prices down sharply. Crude did not fall, despite an unexpected large build in U.S. crude inventory. Traders were starting to buy crude on growing expectations that OPEC will cut production at its Nov. 27 meeting.
Propane started finding buyers on the week’s strong pullback. There were reports of increased interest in propane by petrochemicals in both the U.S. and in Europe to support the rally. Crude moved higher, as the speculation that OPEC will cut production continued to grow.
Propane prices moved higher for a second day, with the possibility of both weather and increased petrochemical demand for propane providing the support. Trading volume was not particularly high, which makes one cautious about the rally. China cut its interest rates to stimulate its economy, which had commodities and equities up early, but both struggled to hold the gains.

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