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December cover


How will natural gas production affect propane supply in 2015?
Cost Management Solutions    
Cost Management Solutions
The winter heating season is well underway, and yet propane inventory remains at record levels. All fall and winter draws on propane inventory have been well below average. At the current propane inventory level of 78.388 million barrels, it would take draws of about 2.4 million barrels per week to get inventory down to 44 million barrels by the last week of March. That is the highest end-of-March inventory level we have seen, and it occurred in 2012. Prices were weak coming out of that year.

Prices dropped 10 cents from 134 cents on Dec. 17, 2011, to 124 by March 30, 2012. By midsummer, propane in Mont Belvieu was 75 cents. Conway was at 115 on Dec. 17, 2011, dropped to 101 by March 30, 2012, and by midsummer was in the mid-50s.

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In recent Trader’s Corners, we have focused on the demand side for propane in discussing the reasons for propane inventory building to, and holding at, record levels. Lower-than-expected demand for crop drying, a mild start to winter, lower use by petrochemicals and a less supportive exporting environment have all contributed to the high inventory.

High propane production has been a contributing factor as well.

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U.S. propane production from natural gas processing plants has been on the rise for years. The increase became more dramatic with increased natural gas/natural gas liquids production in the past few years. It is this increased production, along with a lack of corresponding increases on the demand side, that have caused propane inventory to be at record highs currently.

Interestingly, natural gas production did not decrease, even when natural gas prices fell from more than $13 per million (mm) Btu to $1.90 per mm Btu. Many producers say they need to get $4 to break even on producing the methane that is sold to natural gas utility companies, yet production has not decreased, even though prices have been below that level for the most part over the past four years. Since January 2011, natural gas prices have averaged $3.714 per mm Btu.

The drilling has continued because high natural gas liquids prices for propane, butane and natural gasoline have been more than enough to offset losses on methane, and even ethane, which is trading at 16.8 cents per gallon. But with propane prices off sharply, the economics may not work to continue the drilling.

We think there is a chance that in 2015, growth in propane production from natural gas plants could slow dramatically. In fact, we would not be surprised to see production neutral - or even declining - if crude prices stay low for long. If correct, this development could change the oversupply conditions with propane by late next year.

As we have written many times, natural gas production is the engine that drives propane supply. Knowing the speed and direction of that engine is critical in anticipating the propane-pricing environment in the future. For the first time in years, this engine could be slowing or changing direction.

Until the growth in supply slows or stops, it may remain impossible for efforts on the demand side to lower inventory and support prices. Many thought all of the new export capacity brought online this year would have tightened inventory, but new production simply overwhelmed those efforts.

In recent years, we have simply assumed propane supplies would increase based on the high value for crude. But with crude potentially staying around $60 per barrel for a while longer, that assumption may not be valid for all of 2015.


With the rest of the energy complex moving lower, propane prices managed a slight gain. A million-barrel draw in Gulf Coast propane inventory helped support propane.

Crude moved into a more neutral pricing pattern by the end of the week, but could not recover from early-week losses. Fundamentally, crude remains vulnerable to more downside, but traders want to believe the bottom is near, thus there was buying to cover short speculative positions.

We were neutral all last week and will remain the same to start this week. We would expect volatility in the lightly traded holiday season, but see propane range bound between 50 and 57 cents for now.

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Last Week's Highlights
Propane prices continued their recovery from the big selloff on Dec. 8. Crude continued to fall on no sign that major producers are willing to cut production to support prices.
Propane prices gave up a good chunk of recent gains, as traders turned cautious ahead of Wednesday’s inventory report. In general, inventory data have been on the bearish side this fall and winter. Bad news on China’s factory activity put a bearish bias in commodities and equities trade, but crude managed to find enough buyers ahead of options expiration to close slightly higher.
Mont Belvieu propane gained three-fourths of a cent after the Energy Information Administration (EIA) reported a nearly million-barrel draw in Gulf Coast propane inventory. A build of 400,000 barrels in Midwest inventories prevented Conway from making the upward move with Mont Belvieu. Crude prices closed up after the EIA reported an 847,000-barrel decline in U.S. crude inventory.
A strong selloff in crude pulled U.S. propane prices lower. West Texas Intermediate closed at a new low for the year. A report by the office of the governor of North Dakota suggested that crude production in that state is low cost enough to continue, even in the current pricing environment. That news contributed to the overall weakness in crude.
It was a strong close to the week for propane and crude, but both remain in fundamentally unsupportive positions.

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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.

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