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January cover


A look at the government’s change to PERC's directive
Cost Management Solutions    
Cost Management Solutions
With the Propane Education and Research Enhancement Act of 2014, Congress gave the Propane Education & Research Council (PERC) the responsibility “to train propane distributors and consumers in strategies to mitigate negative effects of future propane price spikes.”

As a body, the Congress of the United States probably knows very little about the workings of the propane industry. However, it is all too familiar with the complaints that come from its constituents (retail propane customers) when propane prices get too high. For that reason, it has instructed PERC to teach the industry what to do about it.

At Cost Management Solutions, we take a lot of pride in having been ahead of this mandate by about a decade. Through our daily publication the Propane Price Insider, hedging workshops, seminars, client relationships and this Trader’s Corner, we have burned a lot of ink and effort in educating propane retailers on the tools available to them to do exactly what Congress has mandated in the hope it will end the instability in propane prices for propane consumers.

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What Congress has mandated has been done successfully by some retailers for years. Many retailers recognized long ago that spikes in propane prices, not their competitors, were the single biggest threat to their business. Price spikes shake up consumers and push them into making decisions concerning their energy source that are never good for the propane industry. And frankly, the decisions they make are not always what is best for them. Out of desperation, they sometimes choose energy sources that are not cheaper over the long run than propane, or take actions that are worse for the environment as a whole.

To us, the greatest tragedy in our industry is that consumers who would be best served by propane have gone other directions because price instability has driven them to do so. It just doesn’t have to happen and we have been on a crusade for years to help our industry avoid such a tragedy.

We were certainly glad the Act included educating consumers concerning how to avoid price spikes. We know many propane retailers who have gotten a cold shoulder from consumers when they have tried to implement budget, cap and fixed-priced programs to help avoid price spikes.

For many consumers, shopping on the “spot” market seems like power and the best way for them to be in control of their propane prices. The fact is, nothing could be further from the truth. Perhaps correcting this misconception is the single greatest opportunity that PERC has to meet this mandate.

Bringing stability to propane prices requires a collaborative effort between the consumer, retailer, wholesaler, producer and trading community. For far too long, the mentality has been for one link in that chain to focus on being in the position to “make a killing” at some point. Yes, those times do come on occasion, but in the interim, that mentality does more harm than good -- to everyone’s detriment.

The good news is that we have seen great progress toward managing price spikes in recent years. Here are a few examples:

• This past year, many retailers told us their customers were demanding fixed or budget-type pricing. Commercial accounts are especially keen on managing propane price risk. That lets us know the word is getting out that these types of options are available.

• The trading community has dramatically changed what volumes they will write on swaps and options for retailers. When we first began helping retailers place trades, trading partners only wanted to do minimum 1,000-barrel-per-month contracts, as was the standard in the industry. But now traders will act as counterparty to almost any volume a propane retailer would care to hedge.

• Retailers have really committed themselves to learning about hedging tools such as swaps and options. They are putting a lot of hard work into developing price stability programs for their consumers and educating the consumer on the benefits. We have seen a wonderful transition from being competitor-focused to customer-focused. We have yet to see a propane retailer who has not improved his business through this transition.

• Propane producers and wholesalers are now very open to selling propane on an index basis to retailers. Index pricing sets the price at supply locations based on the price at Mont Belvieu and Conway, plus a fixed differential. This advancement has allowed propane retailers to place “clean” hedges and greatly increased the interest in using financial tools to manage price volatility and risk.

The extremely high prices and even more extreme volatility in propane prices have come on fairly fast and forced all of us in the industry to rethink our business models and relationships.

As a fuel, propane is flexible, clean and abundant. It has its place in American homes, businesses, industry and transportation. We simply need to accelerate our adaptation to the new realities concerning price volatility.

The government may be late to the party, but it does have one thing right — the single greatest challenge and opportunity for our industry is to stop passing the volatility on to consumers. It is time we stopped pricing like gasoline service stations and more like utility companies.

To do that, we must work together all along the propane delivery chain to bring stable, reliable, predictable pricing to end-use consumers. We have argued long and hard that all parties in the value chain can financially benefit from such predictability.

Last winter, propane consumers and retailers paid too much for propane. This year, propane producers are making too little. In both years, when parties on both ends of the value chain used hedges to manage price volatility, a fair price was paid for the benefit that propane provides and a fair price was received for delivering that benefit. It is that stability and predictability that will allow our industry to achieve its greatest value in the energy marketplace and our customers to appreciate the real benefits of propane as an energy source.


Surprisingly, Mont Belvieu propane went against the rest of the energy complex to post a gain for the week. We still worried about downside price risk - even at the current low prices - given the bearish inventory situation and the continued growth in propane production. A 10-million-barrel build in U.S. crude inventory to 80-year highs for this time of year undermined a brief uptick in crude prices.

Featured photo

Last Week's Highlights
Markets were closed for the Martin Luther King Jr. holiday.
Milder weather forecasts ended the eight-day run-up in Conway propane prices. Meanwhile, Mont Belvieu propane managed a slight gain with pent-up demand coming out of the holiday weekend. Crude fell sharply on a reduction in global economic growth for 2015 and 2016 by the International Monetary Fund.
Reports of reduced drilling activity in the United States pushed crude higher, providing a base for propane to move higher as well. Winter demand allowed propane prices to hit new highs for the year.
The Energy Information Administration reported a 3.6-million-barrel draw on U.S. propane inventory for the week ending Jan. 16, providing support for prices to move higher. Crude prices fell after the report showed a build in U.S. crude inventory in excess of 10 million barrels.
Propane slipped from recent highs as milder weather took a toll on seller resolve. Also, U.S. crude struggled to regain its slight upward movement following last week’s big inventory build. Brent crude managed marginal gains based on the uncertainty of a leadership change in Saudi Arabia. West Texas Intermediate closed at a new low for 2015.

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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
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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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