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DIGITAL EDITION
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THIS WEEK'S TOPIC:
PROPANE SUPPLY
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How refineries contribute
to excess propane supply
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Before we get started on the subject of this week’s Trader’s Corner, let’s update last week's subject. That’s when we looked at the big build in propane inventory and the key reason for it - very low propane demand - and then asked if that kind of low demand is likely to continue. Here’s what we said:
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.
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). 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.
History simply suggests that last week’s demand and inventory build were exceptional and therefore, odds of it repeating are greatly reduced.
Last week, the EIA reported propane demand at 1.024 million bpd, up 322,000 bpd from the previous week. The result was an inventory build for the week of 1.749 million barrels, compared with the 3.8 million barrels the previous week.
Keeping with the theme of factors that are driving higher propane inventory builds, let’s look at propane production by refineries. Not that long ago, refiners were the primary source of propane used for fuel. But the shale gas revolution relegated refiners to second-place status behind natural gas processing. Still, refiners are key cogs in the propane supply chain.
Refineries produce both propane and propylene. Propylene is part of the “propane” inventory number reported by the EIA. Currently, combined propane/propylene inventory in the United States is 78.795 million barrels. Of that amount, 5.370 million barrels are propylene, which leaves 73.43 million barrels available to propane retailers who need fuel-use propane. Petrochemicals can use the propylene.
There has been a change in the trend concerning the amount of propane and propylene refiners are producing. From 2008 through 2011, refiners tweaked their processes to make more propylene to feed demand from petrochemicals. That cut into the production of propane used for fuel.
But over the past three years, propylene production has leveled out whereas fuel-use propane production has increased. That means all the growth in production from refiners has been for fuel-use propane. Fuel-use propane production from refineries eclipsed the 300,000-bpd mark in 2014 for the first time since 2008. The increased production of propane used for fuel puts more propane on the market that needs to be used through retail distribution or exports.
That development makes propane retailers all the more important to refineries for moving their propane, which can only help the pricing environment for the propane retailer.
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WEEK IN REVIEW
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Propane prices regained some of what it lost the week before, with a lighter-than-expected inventory build in support. Crude had a large draw on inventory in support, as it gained as well. Strong demand for gasoline pushed prices higher.
We are neutral on both crude and propane heading into the week. The upward momentum in propane was waning by week’s end, and inventory remains an issue.
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LAST WEEK'S HIGHLIGHTS
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June propane tumbled in early trading, but recovered to trim the losses by the end of the day. Crude fell on reports of lower crude imports by China. The spread between June and winter propane continued to expand, with January propane holding a 21-cent premium to June in Mont Belvieu and 24 cents in Conway.
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Big gains for crude and propane occurred, as prices turned higher ahead of inventory data. Crude led the rally, pushed by a report by the EIA predicting lower U.S. crude production from shale formations in July.
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Propane prices continued to run higher after the EIA reported an inventory build that was below expectations. Even though the 1.7-million-barrel build was about average for the week reported, traders were expecting a build between 2 and 3 million barrels, so the average build actually seemed light. West Texas Intermediate (WTI) crude hit a high for the year, with a 6.8-million-barrel draw on crude inventory pushing the buying.
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A pullback in crude didn’t cause a drop in propane prices, as strong trading volume was present for June propane. The spread between June and January propane closed slightly, as the falling crude appeared to bring propane out months down. Crude was down on profit taking, after hitting a high for the year on Wednesday.
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June Mont Belvieu propane refused to go quietly into the night, with more gains on Friday. The trading volume for June propane was high all week, and that did not change Friday. The buying interest has pushed prices higher, despite a very bearish inventory picture.
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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.
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