|
|
|
DIGITAL EDITION
|
|
|
|
THIS WEEK'S TOPIC:
CRUDE
|
|
The big flip in the dynamic
of the crude market
|
One thing everyone in the propane industry understands is that the value of propane is strongly correlated to the value of crude most of the time. For the longest time in our industry, the primary focus when setting propane-buying strategies was propane inventory levels. As the industry has become more transparent, it has become obvious that there is a lot more to the dynamic of propane prices than just propane inventory.
Propane retailers are aware of the need to understand crude, currency, economics and myriad of other factors – in addition to propane fundamentals – to properly formulate and manage propane price risk management strategies. Fortunately, a lot more sources are available to provide the information a propane retailer needs to perform due diligence before making supply decisions.
The value of crude – and trying to predict the price direction of crude – is key to improving the odds that the decisions we make concerning propane supply are good ones.
The chart above plots the recent closing prices of crude and propane. Obviously, there is a connection between the two. We have often used the analogy that crude is a jet fighter and propane is a missile attached under its wing. As the fighter changes elevation, so does the missile. Occasionally, the missile is fired and moves on its own, but most of the time, it is following the gyrations of the fighter.
As propane buyers, we must know the direction of the fighter first and foremost and then be aware of the conditions that would cause the missile to be launched. Over the next few weeks, we are going to look at crude (the fighter) from several different angles. However, the most important thing to know right now is that fighter protocols may have changed forever. The rules of engagement have changed, and we need to be aware of them as we consider the theater of war.
Below is the premarket update we sent our daily subscribers and clients at 7 a.m. CST last Friday.
Crude is up in early trade, but so far, technical resistance has limited the gains to a high of $51.85. Crude is benefitting from reports that U.S. shale producers are going to postpone completing wells that have already been drilled. It has been assumed that producers would proceed with completion of drilled wells, keeping U.S. production growing for a while longer. However, if producers are going to stop with completion work, U.S. production is going to fall much more quickly than anticipated.
So far, all of the cutbacks in capital spending by oil companies have not resulted in actual decreased production. This past week, the Energy Information Administration (EIA) reported U.S. production at 9.280 million barrels per day (bpd), up from 9.226 million bpd the previous week. Our records go back to 1983 on crude production, and last week's production rate is the highest on record since then.
A problem for crude bulls has been that the Organization of the Petroleum Exporting Countries (OPEC) producers are increasing production to gain market share, even as announcements of more capital spending cuts by U.S. producers have been announced. It would appear that Saudi Arabia and other OPEC members are intent on doing serious long-term damage to the U.S. oil and gas industry that must deal with much higher costs and thus needs much higher crude to be profitable. OPEC can handle low prices due to its relatively low production cost and can increase net revenue by gaining market share against higher-cost producers in this low-priced market.
It is highly likely this strategy by OPEC will continue, and improvements in the U.S. energy industry will not improve until the global economy is healthy enough to absorb new production from the U.S. In general, OPEC has long been the swing producer for the world, allowing everyone else to produce at maximum rates and OPEC regulating its production to balance markets.
OPEC is taking a new approach now, which is to force high-cost producers to be the world's swing production. This strategy makes sense, as it is market-based and could be best for price stability in the long run, but it is going to be very bad on the U.S. oil and gas industry in the short run.
The seeming fact that OPEC’s strategy is to remove itself from the role of swing producer and let market force relegate what crude gets produced could cause the current low-price environment for crude to last a little longer than earlier predicted. Frankly, many were blindsided when OPEC did not cut production at its meeting last November. Most everyone assumed that because most OPEC members needed crude prices well above current market prices to balance government budgets, it would be OPEC under pressure to cut production to keep prices high.
However, it is obvious that OPEC, especially Saudi Arabia, is no longer fixated on the price of crude, but rather on revenue generation. That can be accomplished by selling more barrels at a lower price. That has been the second big shock for crude markets over the last week. Saudi Arabia is said to be increasing production to nearly 10 million bpd, even as old logic would dictate they should be staying flat to lowering production.
With Saudi Arabia/OPEC seemingly intent on changing its role in crude markets from swing producer to base producer by using its tremendous advantage of lower production costs, the low crude price environment may be around a little longer than we expected.
The assumption has been that crude prices would recover in the second half of this year. But those assumptions did not include OPEC increasing production, which will offset the decreases in production by U.S. and other high-cost producers. It would seem that OPEC is going to employ a strategy of maximizing market share and that strategy may take longer to employ than many think. The real, sustainable recovery in oil prices is unlikely to take place until the economies of Europe and Asia improve and increase energy demand. At this point, it is anyone’s guess as to when that will occur.
|
|
WEEK IN REVIEW
|
|
Strong winter weather allowed propane prices to hold firm last week, despite a slip in crude. Crude’s rally once again ran out of steam around $53, which has become a solid barrier. Crude fundamentals are bearish, despite the speculative interest that is keeping crude prices from falling at this point. Still, we are not sure that the speculative interest will hold much longer, and are therefore bearish on crude.
|
|
LAST WEEK'S HIGHLIGHTS
|
|
|
|
Markets were closed for the Presidents Day holiday.
|
|
Supportive winter weather had propane trading at new highs for the year. Concerns about threats to crude supplies due to the ambitions of the Islamic State in the Middle East and the fighting of rival factions in North Africa had crude prices rising.
|
|
Propane turned lower as traders became cautious ahead of the holiday, which delayed an Energy Information Administration (EIA) report due out on Thursday. Falling crude also was a factor in the modest decline. West Texas Intermediate (WTI) crude once again failed to cleanly break free of the $53 mark that had been its stumbling block two other times since prices turned higher on Jan. 29. An increase by the Chinese government in the amount of allowable refined products exports of 20 percent was a headwind for crude as well.
|
|
A sharp drop in crude kept propane prices subdued, despite an inventory draw that was about 1.3 million barrels above average for week seven of the year. Crude prices plunged when the American Petroleum Institute (API) reported U.S. crude inventory built 14.3 million barrels last week. However, that report was countered by the more closely watched EIA report that showed a 7.7-million-barrel build in crude, which caused crude prices to trim losses before the close. Reports that Saudi Arabia was increasing crude production to nearly 10 million bpd also put downward pressure on crude prices.
|
|
Mont Belvieu propane sellers leveraged the 2-million-barrel draw on Gulf Coast propane inventory that was reported by the EIA on Thursday to move higher in early trading, but faltered at the close. Conway followed crude, falling in the morning, but found enough interested buyers going into the weekend to finish slightly higher. Crude fell in the last trading day for the March futures contract.
|
|
|
|
CONNECT
|
|
|
|
|
|
|
WHAT IS COST MANAGEMENT SOLUTIONS?
|
|
|
|
|
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.
|
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.
|
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
|
|
|
GOT STORY IDEAS? Email Brian Richesson, Editor in Chief
LOOKING FOR ADVERTISING OPPORTUNITIES? Email Brian Kanaba, Publisher
|
|
|
|
