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December cover


Lessons that already can be learned from this fall and winter
Cost Management Solutions    
Cost Management Solutions
This summer, propane inventory grew to record levels at more than 80 million barrels. However, propane prices held up well, even with crude prices falling. With crude on a steady decline and inventory on a steady rise, propane prices would not go below a dollar leading into fall.

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A strong winter and an active crop drying season were expected to pull inventory down through the winter. After winter, more propane export capacity was expected to limit inventory builds.

One great lesson to learn from this year is that when propane is trading on expectations and not on fundamentals, we should be more careful about locking down the price on too much supply.

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After last winter, the $1 to $1.10 propane level was very appealing. Let’s be honest, buying propane at that level to protect our customers from what they experienced last year was not a bad decision. It doesn’t feel like it now, but it was the right thing to do.

Buying at that price was not the mistake, really. The greater error was ignoring the fundamentals and locking down the price on too much of supply that was speculation. Retailers who sold to their customers on programs using fall prices that were above $1 have not been hurt.

Neither have the retailers who limited what was pre-bought to about 50 percent of total sales volume. A 50 percent pre-buy level has allowed plenty of room to cost-average-down by buying at current market prices.

Further, most retailers are reporting that retail prices are holding up very well, so there has been plenty of extra margin to pay speculative losses, in most cases.

The other mistake, of course, was holding on to positions that were losing for too long. If a retailer buys a pre-buy or a swap on speculation, he should always have a stop loss in mind. A stop-loss point is a number that will initiate a closing of a position.

For example, a fall position bought at 105 cents might have a stop loss of 90 cents. A retailer would predetermine that he will close the position - no matter what - if prices reach that point.

Buying put options or selling swaps can be used as tools for initiating stop losses for both pre-buys and bought swaps.

Obviously, years like this one highlight that the best situation is to be a true hedger and not a speculator. We have seen propane go from $5 per gallon to 49 cents per gallon in one year. Who knows, before winter is through, we might even see 35-cent propane. So, in this business, we should never say never. Anytime we say the price surely can’t go much higher or it surely can’t go much lower, it seems we always will be proven wrong.

With true hedging, there is a known cost of supply and a known sales price to customers. That is the lowest possible risk we can assume. Some retailers still think that buying no propane is the lowest risk. That is hardly the case. Years like this year are the exception. There will be years in a row where prices are on a general uptrend. The retailer who forces his customer to assume all price risk is going to lose customers over the long run to retailers who try to manage supply costs.

We may not always be able to hedge. Buying is not hard, but putting programs together and backing up the buys with sales to customers is the real challenge. So, almost every retailer finds himself in a speculative situation where supply is locked down at a certain price, but sales are not.

In this case, it is absolutely essential that you don’t let a speculative position get you so out of line with market prices that you are forced to lower prices and thus make less margin or run the risk of losing customers. Our margins and our customers must not be put at risk. That is why stop losses are so important for retailers to define and make sure they execute against speculative positions.


Propane suffered a major sell-off last Monday, with Mont Belvieu and Conway losing 13 percent and 15 percent of their value, respectively. Once the sell-off was in the books, prices generally recovered, with Mont Belvieu down 5 percent and Conway down 10 percent for the week by Friday.

Fundamentals remained extremely weak for crude, and price action reflected that reality. Brent and West Texas Intermediate crude were each setting new lows for the year almost daily throughout the week.

The recovery in propane is mostly price driven and could end abruptly. It may do so on Wednesday if not before, unless propane inventories begin to draw at a more seasonal rate. Either crude has to start gaining or propane fundamentals have to become more supportive, if propane prices are to go higher or even settle into a neutral period. Little recovery is expected for crude prices in the short term.

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Last Week's Highlights
Propane traders made a major revision of propane’s relative value to crude, dropping it from 39 percent on Friday to 34 percent. Propane dropped more than 13 percent in Mont Belvieu and more than 15 percent in Conway. Weak Chinese import data sent crude lower.
Propane mounted a modest rebound, as the new low price attracted some buyers and selling interest waned. A falling dollar encouraged buyers of crude.
For the most part, propane shook off a very light draw in propane inventory of just 257,000 barrels to limit losses despite a 4.5 percent drop in crude. Crude fell on large builds in gasoline and distillate inventory.
Propane prices resumed their rebound attempt, despite the weak inventory draw reported on Wednesday. Weak fundamentals kept crude prices under pressure.
Crude prices continued to plunge deeper into lows for the year, as expectations on crude fundamentals remained bearish. Propane moved higher for a second day in a row as sellers became much less motivated by the current low price.

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Market Information Services

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
  • 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.
Unbiased Analysis

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.

Client Services

Many retailers simply don't have time to analyze the large amounts of data to make an informed purchasing decision.

We offer:

  • Detailed market recommendations on hedge and pre-buy entry points
  • Prompt market execution of hedging strategies
  • Supply cost analysis and recommendation as to effective hedging strategies
  • Large volume consideration when we place your hedges
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