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DIGITAL EDITION
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THIS WEEK'S TOPIC:
PROPANE SUPPLY
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How natural gas processing plants are contributing to excess propane supply
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We have been looking at some of the factors contributing to high propane inventory, and we will continue to do that with this week’s Trader’s Corner. Last week, we looked at propane production from refineries and found they have increased the amount of fuel-use propane production over the past three years.
This week, we are going to follow that up with a look at propane production from natural gas processing plants. As we said last week, because of the increases in natural gas production from shale formations, natural gas processing now accounts for the majority of the propane supply.
The growth in supply from natural gas plants remains unabated. During 2014, natural gas plants supplied 944,000 barrels per day (bpd) of propane, up from 823,000 bpd the previous year.
Through March of this year (when the last official data were available), the growth in propane supply from natural gas processing plants was still going higher. The steady growth puts a lot of pressure on the demand side to move or consume the new product, or run the risk of driving prices lower.
Unfortunately, the demand through retail distribution has been fairly stagnant. That means the new supply of propane has to be consumed by petrochemicals or by exporting. Petrochemicals have a lot of cheap feedstock options like ethane from which to choose. That is putting more and more pressure on propane exports to balance supply and demand.
That is one of the reasons a storm that disrupted propane exports in the Gulf of Mexico last week had such an adverse effect on prices last Monday. More export capacity is expected to be completed by the end of the year and could, assuming the world wants more cheap U.S. propane, begin to bring some balance to U.S. supply (natural gas plant, refinery production and imports) and demand (domestic consumption by retailers, petrochemicals and exports).
Because the new export capacity will not be online until the end of the year, and because propane supplies are not decreasing even though there has been decreased drilling activity, retailers still must recognize the potential for the oversupply situation to continue for a while longer. July’s propane is running about 4 cents higher than June’s. One has to expect that if inventory builds continue as they have, the premium that July holds will erode as June comes to an end.
One also has to consider the high premium that winter propane holds over current month propane. If fundamentals do not change before winter, that premium could erode as well. Increased domestic demand should slow inventory builds, but they are already very high.
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WEEK IN REVIEW
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Propane prices had a very bearish week, with concerns about export activity undermining prices on Monday. Prices could never recover the loss, even though the storm that upset exports passed. Wednesday’s inventory report showed U.S. propane over the 80-million-barrel mark, and that seemed to break the back of any rebound thoughts. Propane is near year lows, which should limit the downside whereas fundamentals will limit the upside. Consequently, we will remain neutral on our price outlook for propane.
Crude is still overpriced - given the fundamentals - in our opinion, but crude markets don’t appear to be listening very closely to our opinion, as prices remain in a neutral pattern. U.S. crude production is not dropping, and the Organization of the Petroleum Exporting Countries (OPEC) is producing at record rates. Supply is exceeding demand by some 2 million bpd. If a deal is reached with Iran on its nuclear deal (the deadline is at the end of month), it could unleash 40 million barrels of stored crude onto global markets. Still, any pullback in crude prices is seen as a buying opportunity, so we will keep our opinion, but remain neutral in our outlook.
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LAST WEEK'S HIGHLIGHTS
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Propane prices took a dive, with speculation that the reason was the closing of the Houston Ship Channel due to a tropical disturbance in the Gulf of Mexico that delayed propane exports. A report that 40 million barrels of crude is stored in tankers by Iran was bearish for crude.
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Propane prices were up in a very lackluster session, as worries about propane exports continued to plague propane markets. Crude prices were up on expectations of more draws on U.S. crude inventory.
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The Energy Information Administration reported a 1.865-million-barrel build in U.S. propane inventory, slightly below the five-year average and below industry expectations. However, that did not prevent propane prices from resuming their downtrend. The draw on U.S. crude inventory was more than expected, but a surprise build in U.S. gasoline inventory caused crude prices to fall slightly.
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Propane prices bounced higher on word the Houston Ship Channel was reopening, positive news for U.S. propane exports. Crude prices went higher, primarily due to a weaker dollar. Concerns about the Euro zone due to Greece’s debt crisis limited the upside for crude.
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The rebound attempt for propane prices did not last long, with both hubs retreating to close what turned out to be a very bearish week. Crude prices also fell on reports that U.S. crude production from shale formations would likely increase for 2015, despite decreased drilling activity. While the growth in crude production from the U.S. has slowed dramatically, actual decreases in production have yet to occur.
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CONNECT
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WHAT IS COST MANAGEMENT SOLUTIONS?
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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
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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.
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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.
Contact us today to see if you can benefit from having the Energy Price Watchdog working for you.
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Many retailers simply don't have time to analyze the large amounts of data to make an informed purchasing decision.
We offer:
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Detailed market recommendations on hedge and pre-buy entry points
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Prompt market execution of hedging strategies
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Supply cost analysis and recommendation as to effective hedging strategies
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Large volume consideration when we place your hedges
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