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June cover


Below-average inventory builds attract attention
Cost Management Solutions    
Cost Management Solutions
At nearly 82 million barrels, U.S. propane inventory is at record highs for this time of year. However, prices moved higher last week. What might be motivating propane markets, despite the very weak fundamental backdrop?

Below-normal inventory builds three weeks in a row may have motivated propane buyers.

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The chart above shows a pattern of mostly above-average builds in propane inventory this spring, through May. However, in June, there were three consecutive weeks of below-average inventory builds.

Of course, that kind of trend change gets attention. Couple that with the fact that the build for the week ending June 19 - the date data were collected for the last Energy Information Administration (EIA) report - was significantly below the average build. The five-year-average build for week 25 has been 1.865 million barrels. The EIA reported only a 1.308-million-barrel build. When inventory builds are below average by more than 500,000 barrels per week, then it’s time to pay attention.

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The key reason for the below-average build was a sharp jump in propane exports. The EIA estimated exports for the week at 600,000 barrels per day (bpd), up from 449,000 bpd the week before. It is unlikely exports will remain that high for long, primarily because there is believed to be a shortage of ships to maintain that export pace.

Should these three weeks of below-average builds be having an impact on prices, given the high inventory position?

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U.S. propane inventory is already at a record 81.968 million barrels for this time of year, putting it at 12.936 million barrels over the average starting winter inventory position of the past three years. Given the surplus of inventory, even below-average builds are adding to an already oversupplied situation. Currently, U.S. propane inventory could draw 862,000 barrels per week between now and winter and still be at the average inventory position of 69.032 million barrels.

The key here is that propane values have already been severely hammered this year.

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Propane’s relative value to West Texas Intermediate (WTI) crude is at historic lows. To keep propane at such extreme lows relative to crude, there can be absolutely nothing bullish in propane markets. Three weeks of below-average inventory builds is bullish regardless of the bearish inventory backdrop.

The reality is we are dealing with extremes in inventory, price and relative valuation. When we are dealing with extremes, we generally see a lot of volatility in prices. When in these conditions, markets can react violently to seemingly minor changes. Try not to get caught up in the overreactions. However, don’t ignore the possibility that the supply/demand balance for propane could be tightening going forward. Over the coming weeks, be particularly aware if the below-average inventory build trend continues and if high exports remain the reason.


June propane recovered its losses from the previous week. However, winter propane prices changed little, staying in the 50-to-55-cent range. Light inventory builds supported the recovery.

Crude was unable to gain any traction, as the uncertainty of the Iran nuclear negotiations and the Greek debt talks kept traders cautious.

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Last Week's Highlights
Mont Belvieu propane moved slightly higher, as some buying was initiated by the 16 percent decline in prices the previous week. Conway could not get any momentum, however, and set a new low for the year at 28.75 cents. Hopes the Greek debt crisis would be resolved helped crude post modest gains.
Propane prices rallied ahead of Wednesday EIA inventory data, suggesting traders were expecting another light build in inventory as has occurred the past two weeks. Speculation that the EIA was going to report a big draw in gasoline inventory pushed crude higher.
The EIA reported another below-average build in U.S. propane inventory, sending propane prices higher. The push had Conway eliminating all of its losses from the previous week. Mont Belvieu propane was up 13 percent on the week, but still short of eliminating the 16 percent decline from the previous week. Crude prices fell, as a surprise build in gasoline inventory pushed buyers to the sidelines.
Mont Belvieu continued to chip away at its losses from two weeks ago and Conway added to strong gains for the week, as the light inventory builds continued to support propane buying, despite a drop in crude prices. The build in gasoline inventory continued to hamper crude markets, sending prices lower.
Mont Belvieu propane continued to separate itself from Conway propane prices. A spread of 7.25 cents developed between the two hubs, with Mont Belvieu carrying the premium. Crude had a volatile day, as traders considered the likelihood of both an Iranian nuclear deal and a Greek debt deal getting done before their respective June 30 deadlines.

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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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