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Unexpected inventory build sinks propane prices
Cost Management Solutions    
Cost Management Solutions
Propane inventory built more than 3.8 million barrels last week, putting propane prices in a tailspin. Over the past two months, propane inventory builds have been above average in all but one week.

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Those high builds were generally unexpected. Many believed that reduced propane production due to less drilling activity and higher exports and petrochemical consumption would conspire to limit this year’s propane inventory builds.

As the data shows, inventory builds have been opposite those expectations. But last week’s inventory build was exceptional even by this year’s already high standards. Obviously, we want to know the cause of it and whether we should expect such exceptional builds to continue.

The quick answer is probably not. Yes, we could reasonably expect above-average builds to continue for a while longer, but the odds are against 3.8-million-barrel builds. Here’s why.

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Last week’s inventory build was primarily driven by a drop in U.S. propane demand. Demand dropped from 984,000 barrels per day (bpd) the previous week to 702,000 bpd for the week just reported by the Energy Information Administration (EIA). As the chart above shows, such low propane demand is not unprecedented, but it is unusual.

In fact, we had the same kind of drop the same time last year. Both were well below the five-year average demand. If we follow last year's pattern, we should see a demand increase from this point forward. The low demand for the year usually occurs one month before or after June.

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The market certainly reacted bearishly, as it should have, to the big inventory build that was driven by a sharp drop in demand. However, the odds favor improving demand to lend itself to lower inventory builds from this point forward. That won’t change the fact that propane inventory is at record-high levels for this time of year. Nor does it necessarily mean inventory builds will be below average going forward.

History simply suggests that last week’s demand and inventory build were exceptional and therefore, odds of it repeating are greatly reduced.


There was a big drop in June propane prices after the EIA reported a 3.8-million-barrel build in U.S. propane inventory. However, winter prices resisted the fall, staying above 50 cents at both hubs. Crude was down, as traders were more conscious of fundamentals ahead of the Organization of the Petroleum Exporting Countries’ (OPEC) meeting on Friday. Even though OPEC did as expected by not decreasing its production, there was still a rebound in crude on Friday.

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Last Week's Highlights
Propane prices continued to rise, carrying over momentum from Friday. Both Mont Belvieu and Conway were up in the 5 percent range, even as crude posted a small loss.
The upward momentum for propane prices slowed as traders focused their attention on the upcoming inventory data instead of the late rally the previous week. West Texas Intermediate hit a high for the year, as a falling dollar encouraged the buying of commodities.
A surprisingly large build in propane inventory of 3.8 million barrels collapsed June propane prices. Crude fell despite an inventory draw, as traders become focused on the upcoming OPEC meeting. OPEC was not expected to change its output targets, and that had traders focusing on the global oversupply of crude.
The collapse of June propane prices continued unabated, but out months were resisting the fall. Winter propane remained about 50 cents.
The drop in June propane slowed. Out-month values held firm, with winter going in the 52.75-cent range by the end of the day. OPEC held firm as expected on its production quota, but crude had a technical bounce off its 50-day-moving-price average, closing up on the day in very volatile trading.

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