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December cover


What must transpire for propane prices to rise?
Cost Management Solutions    
Cost Management Solutions
This past week, Conway propane was setting a new low for the year at 46 cents and Mont Belvieu was very near its low for the year. Conway broke below the 50-cent mark after another bearish inventory report from the Energy Information Administration (EIA). U.S. propane inventory remains at record highs as the midpoint of the winter heating season nears. So far, there have been no reports of decreases in natural gas or natural gas liquids production due to low prices.

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In its weekly inventory data as plotted above, the EIA reported peak inventory this winter at 81.612 million barrels nine weeks ago. Inventory has only declined 3.772 million barrels to 77.84 million barrels since peaking.

Inventory levels have never been near that level at this point in the year. Previously, the high at this point in the year was 68.85 million barrels in 2012. Propane prices dropped more than a dime before the end of that winter, and dropped even more sharply into midsummer.

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It is possible that propane inventory has declined more than the weekly data suggests, since the EIA reported 82.371 million barrels at the end of September in its official monthly inventory data - about 2 million barrels more than the weekly data showed at that time.

It has been widely speculated the EIA has reported lighter-than-actual draws on inventory this winter to adjust the weekly data to more closely reflect the monthly data. Either way, inventory remains high and is on a trend that would easily leave it at record-high levels at the end of this winter.

In order for propane prices to sustain any type of recovery, this very weak fundamental landscape needs to change. But to this point in the year, inventory has not been coming down even at a normal rate, much less the above-normal rate that would be necessary to avoid record-high inventory by the end of this winter.

The other way we could see propane prices recover, even if the fundamental picture for propane remains rather weak, would be a recovery in crude oil prices.

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But again, we find a very weak fundamental picture. U.S. crude inventory also is at record-high levels for this time of year, and made a major jump last week.

The Organization of the Petroleum Exporting Countries (OPEC) believes the only way to fix the oversupply in crude markets is to let prices fall enough to cause crude production from high-operating-cost projects to decline.

In particular, OPEC hopes the low prices will decrease the expansion of production from U.S. shale formations and from deepwater drilling. There is also the expectation that high-cost alternate energy projects will be shelved and that the low price will stimulate demand.

Many analysts believe crude prices will begin to recover in the second half of 2015. Between now and then, the expectation is that Brent crude will stabilize around $60 per barrel. Saudi Arabia is setting its internal budgets based on $60 crude for 2015.

It would appear there isn’t a lot of reason to believe crude will be higher than where it is now before the end of this winter - and possibly through spring.

If issues could get resolved in Libya, which has at least 700,000 barrels per day of crude offline; exports from Iraq continue to increase; or the low price does not shelve some of the high-cost projects OPEC expects, it is possible for crude to go lower. Some have projected $50 crude before prices stop their fall.

At this point, there is every reason to believe propane prices will be neutral-to-lower between now and the end of winter, unless something dramatically changes in the recent trends in crude and propane fundamentals.


The EIA reported more bearish inventory data for propane, crude, refined products and natural gas, sending all down for the week. Light holiday trading also had an impact on markets.

As hard as it is with propane prices already so low, we go into this week bearish in our outlook for prices.

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Last Week's Highlights
Propane prices fell to start the week. Falling crude prices pulled propane lower, with Conway down almost exactly the same percentage of value as West Texas Intermediate crude. Mont Belvieu found enough buyers to resist the fall in crude. More comments by OPEC that they will keep production up to retain market share regardless of how far prices fall were bearish for crude prices.
An upward revision in U.S. third-quarter gross domestic product to a growth of 5 percent sent commodities and equities prices higher. Propane prices benefited from the surge in crude prices. Also, a report showing oil companies would reduce capital expenditures next year supported crude.
Propane prices had a major pullback after another bearish inventory draw of just 548,000 barrels. Conway dropped to a new low for the year at a 46-cent close. Mont Belvieu closed not too far above its low for the year as well. Crude retreated on a 7-million-barrel inventory build that had it at record highs for this time of year.
Markets were closed for the Christmas holiday.
Trading activity for propane was very light. Prices were lower by the end of the day, with Conway trading at a new low for the year. Crude was up in early trading, but could not hold the gains, which also worked against any rebound attempt by propane prices.

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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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