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DIGITAL EDITION
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THIS WEEK'S TOPIC:
2014 PROPANE PRICES
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A look at the extreme range of propane prices in 2014
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In the propane business, just when you think you have seen it all, you find out you haven’t seen anything yet. If 2014 taught us anything, it taught us to “never say never” in this business. If we had a dollar for every time someone asked, “How much higher can prices go?” last winter, or “How much lower can prices go?” this winter, we would be rich beyond our wildest dreams.
In fact, 2014 propane prices turned out to be beyond our wildest dreams, or nightmares.
On Jan. 23, 2014, Conway propane closed at an all-time high of 460 cents. On Dec. 31, 2014, it set its lowest close in 13 years at 42 cents. Whaaaaat! Yeah, that’s right, a 418-cent spread between the all-time high and a 13-year low within 12 months.
Mont Belvieu prices were rather tame by comparison, with a high of 169.5 cents set on Feb. 10, 2014. The low close for the year on Dec. 31, 2014, was at 49 cents. That was a relatively pedestrian trading range of just 120.5 cents.
However, every propane retailer in the country remembers the huge price spreads between Mont Belvieu and distribution points east and north that made buying supply just as painful for dealers in those regions as their contemporaries in the Midwest last winter.
In a lead-in to Monday Night Football, old clips are shown. In one clip, commentator Dan Dierdorf is recorded as saying about an event in a football game, “Lord, you can take me now. I have seen it all.” One would think we could be safe in repeating Dierdorf’s exclamation concerning this year’s propane prices given the extremes, but can we?
In the spring, we spoke at a convention and made the bold prediction that the low for propane prices in 2014 would be 87 cents. We had some valid arguments at the time that seemed very logical. Frankly, many in attendance seemed to laugh at the notion that propane prices would come close to 87 cents this year. You could certainly understand their skepticism, after the high prices they just had been dealing with as mentioned above.
As one retailer we speak with often was fond of saying earlier this year, “These darned exports are draining the pond.” But now, exports and all, the pond has turned into an ocean of propane.
Each year, as one winter ends and the focus shifts to supply for the next, we remind each client not to trade as if the previous winter is going to repeat itself. It is common for retailers to do that, even though the reality is that pricing environments rarely repeat two years in a row.
Nonetheless, who could be critical of buying supply when propane seemed to be in a steady range between 100 and 110 cents? Given the situation earlier in the year, buying at those prices seemed like stealing to most of us.
Yes, inventories were building, but there appeared to be lot of reason to believe that exports, crop drying and winter demand were all going to pull those inventories down. And who in the world would have believed the Organization of the Petroleum Exporting Countries (OPEC) would allow crude prices to fall to below $60 per barrel? Most of us said, “How can I be wrong owning a dollar propane for this winter,” with good reason.
The lesson from this year is: Don’t try to out-guess propane markets. Don’t ever con yourself into believing you know what is going to happen. Instead, manage the price risk in such a way to make sure you will always have competitive supply. We have to make assumptions in any decision-making process, but we must realize that it is a dynamic market and the assumption can be wrong.
As we said in a recent Trader’s Corner, the mistake of most retailers was not the decision to buy propane between 100 and 110 cents. Based on the price-risk profile at the time, it was the right choice. The mistakes were threefold: 1) Ignoring the high inventory level and fixing the cost on too high of a percentage of supply needs. 2) Not making a strong enough effort to sell against supply positions. 3) Not responding to the changes in the price-risk conditions and adjusting supply positions to reflect the new reality in a timely manner.
Extreme downward price moves during winter are rare. However, when they occur, we have to make sure we remain competitive. That means being willing to accept relatively small losses and not hang on to positions too long.
Most winters, the positions that were taken by most retailers heading into this winter would have paid off handsomely. But when the market goes against us, consider selling swaps to close positions, buying puts to protect held positions from falling prices, or buying call options instead of pre-buys and swaps to protect against rising prices.
Making the wrong assumption generally is not the critical mistake of most propane retailers; rather it is ignoring changes that make those assumptions invalid. For the coming year: 1) Use current information to make educated assumptions about next year’s pricing environment. Write those assumptions down in a prominent place that encourages you to review them. 2) Position your supply to manage the risks associated with those assumptions. 3) Each workday, quickly review the assumptions and ask if they remain valid. 4) As new information becomes available, if the price risk changes, make adjustments in your supply position.
Fortunately, propane retailers now have a plethora of risk management tools to use at their discretion that allow them to take positions based on initial assumptions, and the flexibility to adjust positions as the price-risk profile changes.
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WEEK IN REVIEW
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Fundamentals remained very weak for propane and crude to close out the year. We see no reason, other than already incredibly low prices, to not be bearish on both propane and crude.
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LAST WEEK'S HIGHLIGHTS
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Propane prices were up with some pent-up demand coming out of the holiday, but falling crude prices eventually eroded the gains and resulted in small drops in price at both hubs. A report showing a decrease in U.S. oil drilling rig activity and lost production in Libya initially supported crude, but generally weak fundamentals were too much for those to support all day.
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Conway was up early, but eventually slipped to a new closing low for the year. Mont Belvieu lost 1.375 cents, managing to stay just above its low close for the year. A report showing that OPEC output was at a six-month low in December had crude up.
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More bearish inventory data sent propane prices down sharply. The inventory draw of 596,000 barrels was about a million barrels short of normal for week 52 of the year. Conway was hammered on a 545,000-barrel gain in Midwest inventory. Overall, weak fundamentals kept crude moving lower to close the year with both West Texas Intermediate and Brent at new low closes for 2014.
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Markets were closed for the New Year’s holiday.
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It was a volatile day in commodities and equities markets, with traders starting to get positioned for the new year. Weak data on Asian and European economies worked to undermine early gains in both asset classes. It was a light day for propane, without much movement in prices.
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CONNECT
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WHAT IS COST MANAGEMENT SOLUTIONS?
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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
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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.
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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.
Contact us today to see if you can benefit from having the Energy Price Watchdog working for you.
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Many retailers simply don't have time to analyze the large amounts of data to make an informed purchasing decision.
We offer:
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Detailed market recommendations on hedge and pre-buy entry points
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Prompt market execution of hedging strategies
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Supply cost analysis and recommendation as to effective hedging strategies
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Large volume consideration when we place your hedges
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GOT STORY IDEAS? Email Brian Richesson, Editor in Chief
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