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July cover


Propane inventory surpasses the 90-million-barrel mark
Cost Management Solutions    
Cost Management Solutions
The Energy Information Administration (EIA) reported last week that total U.S. propane and propylene inventory had surpassed the 90-million-barrel mark on July 31.

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Indeed, propane inventory has been setting new five-year-high inventory marks every week this year. Inventory levels have long been past the 81.612-million-barrel record high that was set last year. Still, the breaching of the 90-million-barrel mark seems significant.

On the last day of July, inventory was 90.378 million barrels. The 81.612-million-barrel high of last year was not reached until mid-October. We are still 11 weeks away from that point on the calendar.

Perhaps it is not the breaking of the 90-million-barrel mark that is the news. It is just that reaching that milestone reminds us that propane markets seem inflexible in adjusting to supply/demand imbalances.
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Producers have watched prices plummet and propane’s relative value to crude sink to record lows. Yet, propane production was up 15,000 barrels per day (bpd) last week to 1.661 million bpd. That was up 80,000 bpd, or 5.1 percent, from the same week last year.

The propane supply is coming from two sources: natural gas processing and crude oil refining. We all know that propane is a byproduct of the refining process. Refiners really don’t consider propane output much, if any, when deciding how to run their units.

With gasoline robust this year and refining margins the best in years, refiners have been running at very high rates all summer. That adds to the propane supply/demand imbalance. But one can certainly understand why refiners could not care less.

With the beginning of school, the U.S. “driving season” will come to an end, so demand for gasoline should slow. That should slow refinery throughput and, thus, propane output.

Perhaps more curious is that natural gas production, which has become the primary source of propane, has not declined. With propane values down sharply, why would natural gas liquids processors not cut back on propane production? In fact, the more important question is: Why haven’t producers cut back on natural gas production, which is the ultimate source of propane and other natural gas liquids?

Producers say they need about $4/mmBtus of natural gas (methane) prices to break even on the methane. Natural gas prices have been below that level for some time. In May (when official data was last recorded), natural gas production was 2.774 billion cubic feet. That is up 107 million cubic feet over May of last year. The rate of growth in natural gas production is slowing, but it hasn’t stopped.

The table below shows value comparisons between last July and this July.

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We know that in the past, natural gas producers justified production by the excellent returns they were getting on natural gas liquids, which are priced off the value of a barrel of crude rather than the price of methane. But since last year, the value of crude has dropped 50.24 percent and natural gas liquids - with the exception of ethane - have dropped that much or more in value.

Propane has seen the most significant drop, followed by butane. Natural gasoline has held up better, given the high demand for gasoline.

With inventories, especially when propane is high and values are declining, one has to wonder how long the natural gas production engine can continue to roll down the tracks.

One thing we consider is that most of the growth in natural gas production is from shale formations. With the nature of the way shale formations are produced, it would seem it is an all-or-nothing proposition. Shutting in an individual well here or there as with conventional production just doesn’t work. Once the investment has been made in the land and the drilling, completion, gathering and processing systems, some revenue is better than no revenue.

For those reasons, the process of slowing natural gas production is more akin to turning a super tanker than a ski boat. Propane production should decline from refiners in the coming months, and domestic demand should increase. But real changes in the supply/demand balance are going to depend on natural gas production and the export of natural gas liquids.


Crude prices continued to struggle against significant fundamental weakness. A drop in gasoline prices added to that fundamental weakness and kept crude in a strong downtrend.

Propane moved into a more neutral stance last week, after an adjustment lower. The inventory build the week before last was below normal, so that provided some support. Conway is closing the price gap with Mont Belvieu.

For now, we remain bearish on crude and Mont Belvieu propane, but neutral on Conway propane.

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Last Week's Highlights
A 5.5 percent drop in gasoline prices pulled the rest of the energy complex lower, including crude and propane. Oversupply continues to push crude toward its low for the year.
Conway erased its losses from Monday, a move that would portend a stronger Conway market than a Mont Belvieu market for the week. A falling dollar and a bounce in Chinese equities markets encouraged the buying of crude.
A below-average propane inventory build sent prices higher, despite the fact that inventory was more than 90 million barrels. Crude initially rallied on a reported 4.4-million-barrel crude inventory draw, but a build in gasoline inventory eventually undermined the rally and sent prices into negative territory by the close.
Mont Belvieu propane gave up its gain from Wednesday, while Conway propane moved higher. Crude also slipped on a decision by Saudi Arabia to make only a marginal increase in its official selling prices, saying it needed to defend its market share. That suggested that demand was not as strong as the Organization of the Petroleum Exporting Countries (OPEC) has been indicating.
The premium that Mont Belvieu propane has been holding over Conway continued to erode, suggesting the high inventory in the Gulf Coast could be affecting regional valuation. Also, Edmonton propane prices moved from below 2 cents to above 10 cents in just a couple of days, which should certainly help Midwest propane values.

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