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July cover


Why the relative value of propane recovered in July
Cost Management Solutions    
Cost Management Solutions
Propane prices dropped last week, as falling crude prices and an above-average build in U.S. propane inventory took their toll. But overall, July was positive for propane values relative to West Texas Intermediate (WTI) crude.

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The chart above shows Mont Belvieu propane’s relative value to WTI crude on a percentage basis. Currently, Mont Belvieu propane is priced at 35 percent of the value of WTI crude.

That is extremely low. In fact, it is setting a new five-year low. However, it is about 10 percentage points higher than the relative value of around 25 percent that occurred in June.

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Conway propane also is near its five-year low relative to WTI crude, but it is also off the low relative value experienced in June. Conway is in the upper 20 percent range relative to WTI crude now, after being in the mid-to-lower-20s in June.
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Propane prices have not changed much and are actually running below where they were. The monthly price average for Mont Belvieu and Conway in June was 38.6477 cents and 32.0852 cents, respectively. Currently, Mont Belvieu is at 38.25 cents and Conway is at 30.5 cents.

The change in the relative value is due to a drop in crude prices. WTI crude averaged $59.86 in June, and is currently at $48.15. As crude dropped in value due to oversupply and the completion of the Iran nuclear deal, propane was getting support from below-average inventory builds. In four of the past six weeks, propane inventory builds have been below average, with hefty exports a key reason.


It was a bearish week across the energy complex, with the exception of gasoline. Crude was down, as global crude fundamentals remained bearish. In addition, a sharp rise in the dollar discouraged the buying of crude and other commodities.

Propane was partly dragged lower by crude, but that didn’t account for all of its weakness. A larger-than-average inventory build contributed as well.

With prices already low, we have resisted going bearish on propane, but last week pushed us to a bear. We remain bearish on crude.

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Last Week's Highlights
Propane prices fell sharply to start the week, despite the Energy Information Administration (EIA) having reported a very light 308,000-barrel propane inventory build the previous Wednesday. Weaker crude was part - but not all - of the reason for the drop in propane. Crude tumbled following an 8 percent drop in the Chinese stock market.
Mont Belvieu propane stabilized, with a rebound in crude prices helping. Conway could not halt its downward slide, however. Crude rallied on rumors that the U.S. crude inventory draw for the week ending July 24 may have been more than expected.
The rumors of a big crude inventory draw were validated when the EIA reported a 4.2-million-barrel draw in U.S. crude inventory. Increases in refinery throughput also supported buying. On the propane side, the inventory build was above average and above industry expectations. Most of the build was in Gulf Coast inventory, sending Mont Belvieu propane sharply lower.
Propane prices finally calmed down a bit, but losses for the week had both U.S. hubs not far off the year's lows. A rising dollar and overall weak fundamentals made it hard for crude to sustain upward momentum.
Crude tried to finish the week on an up note, as a sharp fall in the dollar encouraged some buying of crude and other commodities. But the Organization of the Petroleum Exporting Countries (OPEC) comments that it will not cut production was too much to overcome, and the bounce in crude early in the week was fading. Propane prices continued to be weak.

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