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January cover


Declines in the value of May propane have not fully transferred to winter months
Cost Management Solutions    
Cost Management Solutions
As a propane retailer, it is exciting to see propane prices falling, and they have certainly cooperated in May. However, most propane retailers aren’t interested in buying a lot of propane for May. They are mostly interested in buying the propane they will sell come winter.

Unfortunately, the hefty pullbacks in propane’s value in May have not fully transferred to winter prices.

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The chart above compares the May 1 price of propane to the May 27 price of propane. We looked at where May propane was trading on those respective days, as well as where core winter propane (December to February) was trading on those days.

As the table shows, the drop in May values has not been fully reflected in winter values. For example, May Mont Belvieu was trading at 54.25 cents on May 1, whereas core winter propane was pricing at 60.25 cents. That was a spread of about 6 cents. Looked at another way, the market was pricing at a 6-cent appreciation in the value of propane between now and the core winter months.

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On May 27, propane was valued at 38.25 cents, whereas core winter propane was at 53.042 cents. From May 1 to May 27, the price of May Mont Belvieu's propane had dropped 16 cents. However, core winter propane was down only 7.208 cents. The spread between May and core winter prices had expanded to nearly 15 cents.

At the spread on May 27, a propane retailer buying core winter propane would have to see propane prices increase in value by nearly 2 cents per month to break even. That compares to required gains of less than 1 cent a month had that same position been taken on May 1.

So there is a good chance right now that propane retailers are getting calls to take spot loads of propane for immediate delivery at some fairly astounding prices. But when they call about winter propane, they are a little disappointed.

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Part of the reason for the front-month to winter spread is the way crude is trading. Crude has a lot of influence on propane prices, and that is even more true the further into the future you look. No one knows what propane fundamentals will be months from now, so they tend to look at the price of crude to help set the value of propane futures. Crude remains in an abnormal contangoed pricing environment, where further-out values are higher than front-month values. Just the contangoed crude curve is enough to create a higher-than-normal carry, or spread, between nearby and further-out months.

But we also suspect that propane producers are counting on tighter supply/demand conditions come winter. If you are a propane producer, you want to believe you will not be forced to sell propane in six months at the current prices. But each week that goes by with above-average inventory builds, the less likely propane prices will be 15 cents higher than where they are now by the core winter months. As propane inventory continues to build, what propane producers are unwilling to contemplate slowly becomes reality.

So propane retailers must remain vigilant. Watch for real changes in the rate that propane inventories are building. Also, watch the factors that contribute to those changes, such as propane production, petrochemical consumption, exports, etc. Stay calm now, and look for the indication of when the fundamental situation is changing, to help drive buying decisions.


Last week was volatile for propane prices, which seemed to be driven by events in Mont Belvieu. After dipping sharply on Tuesday, prices recovered by the end of the week and were about where they were at the end of the previous week. So in the end, it was a neutral week for propane. Crude surged on Friday largely due to a second suicide bombing in Saudi Arabia. Fundamentals are still weak for both propane and crude. We are bearish on propane to start the week, but neutral on crude with the uncertainties of the geopolitical situation in the Middle East.

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Last Week's Highlights
Markets were closed on Memorial Day.
May propane prices collapsed on what was believed to be brine pond issues in Mont Belvieu due to rains and flooding. Whatever the issues were, they seemed to primarily affect prices at Enterprise’s Mont Belvieu terminal, and that pulled the rest of the propane markets down with it. Crude was down as the dollar gained.
Propane prices at Mont Belvieu extended losses from Monday, but Conway propane prices did not change. Crude posted another loss, as gains in the dollar turned buyers away from commodities.
The Energy Information Administration (EIA) reported another above-average build in propane inventory, but the market seemed to react more to a local situation at Mont Belvieu. Mont Belvieu propane erased some of the early week's losses, as it looked like whatever was driving prices down previously was getting resolved. Conway stayed out of the fray. Crude gained on another U.S. crude inventory draw.
Propane prices posted a big rally, as apparently issues at Enterprise’s Mont Belvieu terminal were resolved. It is believed those issues, possibly associated with rain and flooding, caused prices to drop on Tuesday. A rally in crude also supported a run on propane.

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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.

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