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DIGITAL EDITION

January cover


THIS WEEK'S TOPIC:
PROPANE PRICING

A look at the price spread between Mont Belvieu and Conway and why it exists
By MARK RACHAL
Cost Management Solutions    
Cost Management Solutions
In times past, many propane retailers couldn’t tell you if their supply was based off of Mont Belvieu or Conway. For them, propane supply began and ended at whatever pipeline terminal, gas plant or refinery they used for supply. They were oblivious to the components that went into establishing the posted price at that location.

Today, the propane retailer who does not understand the upstream components from a supply point would be the rare exception. Almost everyone knows that the posted price they pay in their local market is either based off of Conway or Mont Belvieu pricing. In some locations, product may be based off prices at either U.S. hub.


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The cost of propane supply has become much more transparent to retailers over the years. Most keep up with pricing activity at the hubs, know pipeline tariffs to the terminals they use, what their wholesale marketer is making, and so forth.

If a retailer’s supply is based off of Conway or Mont Belvieu and their market is not affected by the other hub, it might not seem important to know the pricing difference between the two. At least, it is not as important as it is to the retailer who has the option to buy product based off of either Conway or Mont Belvieu.

But in either case, a good understanding of the pricing relationship between the two major hubs is important. And although we limit our discussion today to the price relationship between Mont Belvieu and Conway, knowing the relationship with the major Canadian hubs of Edmonton and Sarnia is important as well. We showed those relationships in our April 17 Trader's Corner.

Today’s focus will be on the price relationship between Mont Belvieu and Conway.

Featured photo

The chart above (click to enlarge) shows the historical price difference between Mont Belvieu and Conway propane prices. The chart is designed so that a value above zero means Mont Belvieu is priced higher or holds a premium to Conway. When the value is below zero, Conway is the higher-priced hub.

Conway is much more affected by winter and crop drying demand. The chart shows Conway usually will hold a premium in the winter months. Of course, that is not always the case. But in general, starting in October and running through the winter months, either the premium that Mont Belvieu holds over Conway is reduced or Conway begins to hold the premium.

In the summer months, the tendency is for Mont Belvieu to hold the premium. With the absence of crop drying and winter heat load, it is petrochemical demand and exports that drive summer propane demand. For this reason, Mont Belvieu is the place for a producer to have his propane so he has the most market options available and the best chance of getting the return he desires during summer months.

Notice that Mont Belvieu has been running an above-average premium to Conway this year. In fact, recently Mont Belvieu has been setting new five-year-high marks in the premium it holds over Conway. At the end of April, the premium hit 8.625 cents.

As a result, the flow of propane has overwhelmingly been from north to south this spring. But now, Gulf Coast propane inventory is already at where it normally starts the winter season. Meanwhile, Midwest inventory still has 8.658 million barrels to go to get to its beginning-of-winter average inventory position. Gulf Coast propane is at 99.17 percent of its beginning winter average inventory position and the Midwest is at 69 percent.

The difference in the inventory positions seems to be having an impact on the price relationship between the two hubs. The differential has been coming down recently. The Energy Information Administration (EIA) reported a 2.314-million-barrel build in Gulf Coast propane inventory and a 355,000-barrel draw in Midwest inventory on its last report.

As a result, by Thursday Mont Belvieu was only holding a 4.375-cent spread. By Friday, the spread was back to 4.75 cents. It takes somewhere between 4 and 5.5 cents to move propane from Conway to Mont Belvieu. With the revaluation of the markets in the past couple of days, a producer in the Midwest is about breakeven on whether to keep his barrels in the Midwest or send them to the Gulf Coast.

He may still like sending the barrels to the Gulf Coast because of the additional markets he can access. However, we are now to the point that we should be watching for more inventory builds in the Midwest and less on the Gulf Coast. Given the difference in inventory situations between the Gulf Coast and the Midwest, we would think there is potential for Conway prices to run in the 4- to 5.5-cent range below Mont Belvieu for a while. If inventories do not start building again in the Midwest, we would look for the spread to tighten even more.


WEEK IN REVIEW

Building U.S. propane inventory is becoming a drag on propane prices. Conway was up this week because Midwest production was getting pushed to the Gulf Coast. The focus has to be on overall inventory, which is high. Crude is looking weaker and may slip into a more sustained downtrend. We are bearish for both propane and crude to start the week.

Featured photo

LAST WEEK'S HIGHLIGHTS
Last Week's Highlights
Conway was down a half-cent and Mont Belvieu up three-eighths of a cent to start the week as West Texas Intermediate (WTI) crude dropped 14 cents. There were signs that weak fundamentals were starting to erode the long-running uptrend in crude.
A fall in the U.S. dollar pushed crude higher. Propane surprised with a 5 percent gain in Mont Belvieu and a nearly 6 percent gain in Conway. It was hard to peg what was driving the buying interest, as propane significantly outpaced crude to the upside.
Mont Belvieu gave back half its gains from Tuesday after the Energy Information Administration reported a 2.3-million-barrel increase in Gulf Coast propane inventory. Meanwhile, Conway was up as Midwest inventory fell 355,000 barrels. Crude surprised by dropping, even though the dollar and inventory data were supportive.
High inventory levels continued to pressure Mont Belvieu propane with front-month May propane dropping 2.25 cents. Prices for winter propane were holding up fairly well, causing a larger price spread between months. Conway lagged the drop in Mont Belvieu, but was still down on the day. Crude fell, as traders became more focused on bearish fundamentals.
Propane prices were very soft in early trade, but trimmed losses into the close. In general, prices followed the movement in crude. WTI fell to a low of $58.42, but managed to rally in the afternoon. However, WTI could not break technical resistance and remained vulnerable to more downside this week.
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