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How will exports, petrochemicals affect inventory builds this summer?
Cost Management Solutions    
Cost Management Solutions
In the past week, U.S. propane inventory only declined 1.938 million barrels. That decline was well below the average of around 3.2 million barrels from the past five years.

Light inventory draws have been a theme all winter and have resulted in propane inventory being at record highs for this time of year at 69.308 million barrels. Still, this draw felt even more bearish than others.

The industry already was expecting a below-average draw of around 2.2 to 2.3 million barrels, so it had to be quite a shock that not even that low of an expectation on the draw could be met.

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One of the reasons for the low draw on inventory was that propane exports fell by 130,000 barrels per day (bpd), from 538,000 bpd to 408,000 bpd. That part of the weekly data was certainly surprising, given recent additions to export capacity. While the weekly data is usually adjusted when the monthly data is finally released, it does affect the weekly inventory builds. Until the Energy Information Administration (EIA) gets a better handle on those weekly numbers, the volatility in weekly export data will affect the propane inventory builds and draws.

Despite the bearish state of propane inventory, reports have been circulating recently that builds in propane inventory will be much slower this summer than last summer. The justification for that slower build rate is expectations for not only higher export rates, but also higher petrochemical use of propane.

Indeed, exports have been on an upward path for some time. In fact, when the official monthly data for October came out recently, exports broke the 17-million-barrel mark for a month for the first time. Exports were at 13.725 million barrels in September and jumped to 17.002 million barrels in October, the last month official data is available.

From January through October 2014, exports averaged 12.545 million barrels per month. The lowest month was 9.571 million barrels in February. If 2005 exports run close to where they did in October 2014, that would be around a 4.5-million-barrel-per-month increase in exports.

Between 2013 and 2014, propane production increased by 155,000 bpd, or about 4.6 million barrels per month. If we assume the same rate of increase this year, the rate of exports already seen in October would be enough to account for the new production.

Therefore, to slow the rate of growth in propane production, exports have to average a higher rate than 17 million barrels per month, or other supply and demand numbers need to change. Certainly the chance for decreased production is there with the potential for decreased natural gas drilling, but for now, the expectations are the growth in natural gas and thus propane production is not going to decline.

As mentioned above, there already is more export capacity now than there was in October, so the possibility of more exports exists, even though the current export economics are not that good.

Another area to look at is petrochemical use.

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Petrochemicals were increasing propane consumption to close out 2014. Cheap propane prices have caused propane to move from 16.8 percent of the total petrochemical feedstock stream in September to 20.2 percent in December. Since September, petrochemical consumption is up about 2 million barrels per month to a rate of 9.8 million barrels per month. That already exceeds the average rate of consumption of 9.3 million barrels per month for all of 2014.

If petrochemicals just held the rate of consumption in December for all of 2015, it would theoretically reduce builds in inventory by 500,000 barrels per month.

One can certainly use the most recent numbers in propane production, petrochemical consumption and exports to validate the expectations for lighter inventory builds this summer.

Nevertheless, there are plenty of wild cards in the game that could alter the current conditions - some that would cause less inventory to build, some that would cause more. What we do know for sure is that inventories are at record levels and some of the assumptions discussed above will have to come to fruition for a higher pricing environment to develop.

As we move forward and plan for next year, we probably should assume a slower rate of inventory builds this summer. We should also probably assume a higher price of crude, which would support higher propane prices by the second half of this year. But with plenty of wild cards still in the game, we will have to monitor all the drivers closely to make sure those assumptions are holding true as spring and summer progress.


Propane prices fell as inventory data became less supportive. Propane fundamentals are very weak and there is little reason to be anything but bearish in the short term. However, crude could be setting up for a little speculative run on anticipation that reduced drilling activity will soon be showing up as less crude supply. Still, fundamentals for crude are not good and any attempt by crude to move up could be choppy at best - if not unsustainable - without concrete proof of declining production.

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Last Week's Highlights
After a strong week last week, Mont Belvieu propane got off to a slow start with a decline of a quarter of a cent. Conway, which had posted a loss the previous week, gained a quarter cent. West Texas Intermediate set another low for 2015, despite a decrease in U.S. drilling activity.
Crude prices abruptly turned higher as the dollar fell on the possibility the U.S. Federal Reserve would postpone raising interest rates, which is expected to happen this year. Mont Belvieu continued to give back its gains from last week that went against the general energy market. Meanwhile, Conway forged higher with another modest gain of half a cent.
Big drops in propane and crude prices occurred after the EIA released bearish inventory data for both. U.S. crude inventory was up 8.874 million barrels to the highest level since the EIA has been keeping records. U.S. propane inventory only fell 1.932 million barrels, much less than the 3.3-million-barrel five-year average for week four of the year.
Propane and crude markets stabilized after the strong selloff on Wednesday. A good weekly jobless claims report that showed first-time claims for unemployment benefits at a 15-year low helped support commodities and equities markets.
A weak gross domestic product reading for the U.S. economy during the fourth quarter had equities markets selling off again and crude was benefitting from the exodus of money from the U.S. stock market. The U.S. economy grew at a rate of 2.5 percent in the fourth quarter, down from 5 percent in the third quarter. A report of a sharp drop in U.S. crude drilling activity last week caused crude to surge in late trading.

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