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December cover


Propane's forward price curve
Cost Management Solutions    
Cost Management Solutions
Each day, we speak to a lot of propane retailers. We send out market updates three times during the day and a full market report each afternoon. Still, our clients and subscribers find themselves out of the “flow” of the market and want to call and get a heads-up on what is going on.

Of course, one of the first questions asked is: What is the price of propane? By default, we give the price of propane for the current month. However, a market is being made for propane about 18 months out on a regular basis. In reality, we should really respond by asking: For which month would you like the price?

In our daily updates and reports, we provide the following table to give retailers an estimate of the price of propane for the 14 months beyond the current month. Of course, they get the current month’s price, too, but in today’s Trader’s Corner, we want to focus on the out-month prices.

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The top of the out-month table (click to enlarge) shows the date and time it was last updated. Prices are constantly changing, so what actually might be quoted by a trader if you called to do a deal would almost certainly be different. However, the table is valuable for giving a retailer the approximate value of propane for any given month.

The first column lists the month for the price from February 2015 to March 2016. After that are strip prices, which are simple averages for given periods. For example, "1st Qtr 16" is the average for January to March 2016. There are average (strip) prices for each quarter, the winter months, the core winter months and one year.

The second column lists the price estimate at Mont Belvieu. The fourth column lists the price estimate at Conway. The final column lists the price at which crude is trading in the out months. Columns three and five show what percentage of crude’s price the propane price is for that month.

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The prices are what, at the moment in time the table was updated, Cost Management Solutions believes a retailer could buy propane for a specific month at the given location. It is in no way a prediction of what prices will be when that month arrives.

By purchasing a swap, for example, a retailer could fix the price of propane near that number for that specific month and location. For that number to be much good to the retailer, he would need to know the typical difference in the price at the hub location and where he physically buys his propane. More and more retailers are fixing that difference with their physical supplier via the use of index-priced contracts.

An index contract means instead of paying a variable posting, the retailer always pays the price at the hub on the day of lifting, plus a fixed differential (say, 10 cents) at a specific supply location. Index contracts are an essential part of making sure swaps and other financial tools are clean hedges. By clean, we mean the price a retailer pays for physical propane at the supply location is somehow directly related to the price of propane at the trading hub (Mont Belvieu or Conway) where financial tools will price and settle.

The retailer also would need to know the cost of transporting the propane from the physical supply location to his bulk tank, and the targeted gross margin on the sell.

So let’s say a large commercial account calls a retailer and says it would like to lock down its propane cost for 10,000 gallons per month for next winter (October 2015 to March 2016). The retailer’s price is indexed to Mont Belvieu.

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The retailer can use the price highlighted above (click to enlarge) to give the customer a quick “estimate” on the price.

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We added a service fee to cover a few variables and the effort the retailer must make to implement the hedge so he can fix the price to his customer and make his expected margin.

In a matter of seconds, the retailer can have the estimate in front of the customer. If the customer says he will take the offer, the retailer would need to let the customer know he must get the actual futures number and will call back with the final price.

The retailer calls Cost Management Solutions and gets an actual quote. Unfortunately, the price of propane has gone up since the last price table was sent out; the actual quote is 58.625. The retailer has that much of a variable covered in his service fee, so he will not need to change the quote to the customer.

The retailer then buys six (October to March) Mont Belvieu swaps for 10,000 gallons each, at a strike of 58.625 cents. This process would take about five to 10 minutes. The retailer then calls the customer to let him know the 127-cent price is done for 10,000 gallons per month for October 2015 to March 2016.

These future prices are available to the propane retailer every day propane markets are open, all year long. In a matter of 20 minutes, the retailer can meet the customer’s needs by fixing his price - and know he just made 50 cents per gallon gross margin on 60,000 gallons in sales, with no risk to price volatility.

Further, if the retailer has credit set up with counterparties, then no money exchanges hands at the time of the transaction. The financial instrument will settle just a day or so after the close of the month in which the physical gas is bought from the supplier and sold to the customer.

If market prices should fall dramatically, it is possible the retailer would have to deal with a margin call if he exceeded his credit limit, but the money would come back to him when all of the transactions settle. The margin call (should it occur) does not affect the final outcome of 50-cent gross margin on the sales.

Like never before, propane retailers have the tools available to them to be selling, margin-making machines.


Conway propane was up 15 percent last week, in a surprisingly strong run. A million-barrel draw on Midwest inventory provided support. Inventory data was on the bearish side for Mont Belvieu, limiting the gains. Crude had a big day on Friday, despite continued weak fundamental data. We are bullish on propane to start the week, but we can’t see the rally lasting much longer. We remain bearish on crude.

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Last Week's Highlights
Goldman Sachs made a dramatic cut in its 2015 oil price forecast, sending West Texas Intermediate crude down 4.47 percent. Propane prices resisted the fall in crude, but both hubs posted losses on the day.
Propane prices posted solid gains of more than 1 percent, despite more selling of crude. Comments from the Organization of the Petroleum Exporting Countries (OPEC) that holding production rates high was the right thing to do was a negative for crude. Propane’s strength stemmed from expectations the Energy Information Administration (EIA) would report a big draw on inventory in its Wednesday report.
Conway propane prices surged more than 5 percent higher after the EIA reported a 1 million-barrel draw on Midwest propane inventory. Crude rallied nearly 6 percent on a falling dollar and on activity associated with crude options and futures contract expiration. Mont Belvieu propane gained, but was held in check by a 732,000-barrel build in Gulf Coast propane inventory.
Conway propane continued its very strong run-up for the week, with the draw on inventory reported on Wednesday remaining the key support. Mont Belvieu, being less supported by inventory, fell with retreating crude. Bank of America projected crude could fall in the $31 to $32 range before finding a bottom.
Propane at both hubs moved higher with crude. Crude was supported by a good report on U.S. consumer sentiment and a report by the International Energy Agency saying lower prices were beginning to have a negative impact on crude production.

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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
Contact us GOT STORY IDEAS? Email Brian Richesson, Editor in Chief

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