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October cover


Traders try to measure magnitude of fall crop drying season
Cost Management Solutions    
Cost Management Solutions
After the release of the Energy Information Administration’s (EIA) Weekly Petroleum Status Report on Oct. 22, propane prices moved sharply higher for five straight trading days.

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The run in prices followed a draw on Midwest propane inventory that indicated crop drying demand was starting to have an impact on U.S. propane supplies. During the five-day stretch immediately after the report, Mont Belvieu propane was up 7.25 cents, or 8.6 percent. Conway propane increased 8.5 cents, or 9.7 percent.

Interestingly, the run in prices was occurring even though overall U.S. inventory actually increased that week by 236,000 barrels to a record 81.612 million barrels. The data for the Oct. 22 report was collected on Oct. 17.

Reports from the field were that crop drying demand had kicked into high gear, with long truck lines common at supply points in much of the Midwest. The decline in Midwest inventory certainly backed up these reports.

With propane prices already in a strong uptrend from Oct. 22 to Oct. 29, the EIA released another report on Oct. 29 for data that was collected on Oct. 24. On that day, U.S. propane inventory had declined another 1.341 million barrels. This time the draw was more widespread, with a surprising 656,000-barrel decline in Gulf Coast inventory.

The Gulf Coast inventory draw was a surprise because most reports stated propane exports were on the decline. Two weeks ago in Trader’s Corner, we discussed the sharp fall in international propane prices that preceded the fall in U.S. propane prices during the first half of October.

One need not look far to find the reason U.S. propane inventory dropped more than 1.3 million barrels during the week ending Oct. 24.

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Propane demand increased by 335,000 barrels, or 28.4 percent, week-to-week. For the week ending Oct. 17, demand was 1.180 million barrels per day (bpd). For the week ending Oct. 24, demand was 1.515 million barrels. Based on last year (see the blue line in the chart), there is room for demand to increase even more in the coming weeks.

But as the chart at the top of this newsletter shows, propane prices fell the two days immediately after this higher-than-expected inventory draw and a big jump in demand was reported. During those two days, trading volume plummeted from what it had been during the week of the price uptrend.

From Oct. 22, propane prices rallied about 9 percent on a 236,000-barrel draw on inventory and 81,000-bpd increase in demand. The next week, prices fell on a 1.341-million-barrel draw on inventory and a 335,000 bpd increase in demand. Of course, that doesn’t seem logical at all.

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Despite the draw reported Oct. 29, as the chart above shows, U.S. propane inventory remained at record-high levels. The inventory draw was shrugged off because there is plenty of propane. The more important question for traders was whether the increase in demand was likely sustainable.

Plenty of doubt began to creep into the market concerning the magnitude of this year’s crop drying. Weather became much more mild across a good part of the Corn Belt, requiring less drying for corn that got drier in the field. There were reports of retailers being way too long on propane for the amount of crop drying taking place (long means you have bought what you need; short means you have not bought what you need). Railcars loaded with propane were already beginning to back up on sidetracks, and some retailers faced possibly canceling scheduled loads at huge penalties. Of course, the cold hit the heartland over the weekend, which could have damaged any corn still in the field.

The industry was expecting U.S. propane inventory to take a major hit during this year’s crop drying season and that was the key reason for the rally that began after the Oct. 22 EIA report. It was the feeling that those expectations may have been too high that sent prices lower to close out this past week.

We would expect another week - or even two - of good draws on propane inventory. And with some good winter demand already kicking in for many high-propane-usage areas of the nation, we would not be surprised to see the draws continue.

For now, the big hit from crop drying that may have been the precursor to tighter inventory conditions later this winter is very much in doubt. As we began this fall, weak propane export conditions and very low petrochemical use of propane required propane producers to hang their hats on a strong crop drying season and strong winter demand to support propane prices.

If we imagine exports, petrochemical demand, crop drying and winter heating as the four legs of a chair that support propane prices, the fall began with two of those legs already sawed off. With the potential for a disappointing crop drying season, a third leg may be about to be whacked.

That puts a tremendous amount of pressure on winter heating demand to carry the day for the sellers. This is setting up to potentially be a volatile winter from a pricing perspective, with the latest winter forecast determining price direction.

Given that only one of the four legs that supports propane prices may still be standing, we believe the overall risk for winter has now increased to the downside. We can’t out-guess Mother Nature and it would not surprise us to see a winter that is harsh enough to support prices. One need only go back one year to find that example.

However, one must manage the risks that are present. Currently, we have record-high inventory, 15.474 million barrels more than this time last year. It appears we are down to one leg of potential demand - winter heating demand - to keep the pricing chair upright. If we are managing risk, we have to consider moves that protect against falling prices.

If we short our winter needs, perhaps we stay short. If we are long, perhaps we consider selling swaps to reduce our exposure to falling prices. If we are long, buying put options also is an excellent way to manage downside price risk. They allow us to keep our length in case winter is very harsh, but gives us protection against falling prices so we gain the flexibility to lower our prices to remain competitive, if necessary.

Of course, options have premiums that would have to be included in our overall cost of supply. But those premiums become our known exposure to falling prices, and we may find them an acceptable expense considering the potential downside risk current conditions represent.


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Propane prices went on a five-day run that allowed them to post a gain for the week, despite retreating on Thursday and Friday. Winter weather may support prices next week, but we begin the week neutral for propane. We remain bearish on crude, with weak fundamentals and now a rebounding dollar.

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Last Week's Highlights
Propane was up sharply, with Conway leading the way due to strong crop drying demand. Crude hit a new intraday low of $79.44 for the year, but rallied late to avoid setting a new close low for the year.
Conway gave up a little of its big gain from Monday, and Mont Belvieu moved up in an attempt to stay in touch with Conway after falling off the pace. Crude ended its two-day slide on a falling dollar that resulted from a report of a slowdown in activity in the vast U.S. services sector.
Big gains in propane after EIA reported a 1.341-million-barrel draw in U.S. propane inventory. Surprisingly, the bulk of the draw was on the Gulf Coast, which had Mont Belvieu prices closing the price discount with Conway. Crude was up with a 5.294-million-barrel draw on U.S. distillate inventory the key support.
The five-day run-up in propane prices ended, as it appears many traders saw prices overdone, given the broader fundamental backdrop for propane. Falling crude also put downward pressure on propane prices. Crude was lower on a resurgent dollar that rallied after the Fed gave an upbeat view of the U.S. economy.
The retreat in propane prices continued into a second day on low volume. The lower trading volume could be pointing to a quick end to crop drying demand.

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