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DIGITAL EDITION

July cover


THIS WEEK'S TOPIC:
CANADIAN EXPORTS

Producers still adjusting to Cochin Pipeline reversal
By MARK RACHAL
Cost Management Solutions    
Cost Management Solutions
It has been more than a year since the Cochin Pipeline that once brought propane out of Canada and into the United States changed course and became a distillate line carrying U.S. product to Canada. The repercussions have been quite dramatic, and the North American propane industry is still adjusting to the change.

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The Cochin Pipeline operated only part of the year in 2014, and has not been shipping propane to the United States since. The result is far fewer exports from Canada to the United States by pipeline in 2014 and 2015.

In 2014, propane exports by rail increased from 2013, but it certainly wasn’t enough to offset the drop in pipeline exports. This year, the effect of the Cochin Pipeline closure is even more pronounced, as exports by truck are exceeding exports by pipeline.


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From 2011 through 2014, exports by pipeline averaged 29 percent of total propane exports. In addition, 59 percent of exports were by rail and 12 percent were by truck. So far this year, 11 percent of exports have been by pipeline, 75 percent by rail and 14 percent by truck.

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Western Canadian producers are working hard to increase rail and truck capacity to offset the loss of access to the Cochin Pipeline. But as the table above shows, current inventory is more than 1 million barrels higher than last year’s and the five-year average for June.

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The impact on pricing has been dramatic. Before the closing of the Cochin Pipeline, Edmonton propane was essentially priced equal to propane from Mont Belvieu and Conway. Since the closing of the Cochin Pipeline, propane values in Edmonton have tanked. In fact, recently there have been periods where propane values were less than zero, and they are not much higher than zero now.

Interestingly, the logistical issues in western Canada have actually put more demand on eastern Canadian product. Also, Sarnia is trading at a premium to both Mont Belvieu and Conway.

Free markets have an amazing ability to adapt to supply-and-demand imbalances. But adapting to the closing of the Cochin Pipeline has certainly been a challenge, and it will continue to be a challenge for the foreseeable future.


WEEK IN REVIEW

Propane resisted the fall in crude, with a light build in inventory supporting it. Crude is showing no sign of ending its downtrend, which picked up steam after the Iran nuclear deal was signed.

We remain neutral on propane and bearish on crude going into the week. Even though propane inventory is at record levels, light builds in inventory in four of the past five weeks will keep it resisting a continued fall in crude prices.

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LAST WEEK'S HIGHLIGHTS
Last Week's Highlights
Mont Belvieu propane broke its recent uptrend with a down day to start the week. Conway held up better than Mont Belvieu, but was still down on the day. Crude was down, as the United Nations Security Council unanimously passed a resolution endorsing the Iranian nuclear deal.
There was little change in propane prices, although Conway did recover its small loss from Monday. Mont Belvieu, however, could not reverse its decline, despite a small gain in crude. A falling dollar helped push crude higher.
West Texas Intermediate crude prices fell sharply after a surprise build in crude inventory. Propane prices rallied, as the Energy Information Administration reported propane inventory was only up 308,000 barrels last week, or about one-fifth of the normal build.
The boost propane prices got from the light inventory build reported on Wednesday quickly faded, with both major U.S. hubs giving back all or part of Wednesday’s gain. Crude was up early on opportunity buying, after prices had closed below $50 on Wednesday. But prices drifted to a negative close after the opportunity buying played out.
Propane prices lost more ground in what turned out to be a bearish week, considering the light inventory build reported on Wednesday. Crude prices stayed in a solid downtrend, with no indication that a turn higher was near.
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