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August cover


A surprising draw in Midwest propane inventory
Cost Management Solutions    
Cost Management Solutions
Last week, the Energy Information Administration (EIA) reported a surprising August draw in Midwest propane inventory.

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It was only a 44,000-barrel drop in inventory, but we actually thought last week was going to be a good build in Midwest inventory. Here is why we thought that might be the case.

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The premium that Mont Belvieu propane was trading to Conway propane (shown in the red line in the chart above) had been coming down over the past month. Mont Belvieu was trading nearly 10 cents higher than Conway in July and is now less than 3 cents. That is a lot of incentive for Midwest producers to move propane to the Gulf Coast.

This was occurring despite the fact that Gulf Coast propane inventory is already 24.926 million barrels above its average winter starting level. Meanwhile, Midwest inventory is still 654,000 barrels below its average winter starting position.

As we have said, the Gulf Coast is the place to have propane this time of year, due to more options to sell to petrochemicals or export. Canadian producers also have been going straight to the Gulf Coast with production when they can. But since Aug. 1, Edmonton propane prices jumped about 8 cents.
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The jump in Edmonton propane and the quick decline in the Mont Belvieu premium from nearly 10 cents to less than 3 cents had us thinking that perhaps storage on the Gulf Coast was beginning to lessen. If there isn’t room on the Gulf Coast to take Midwest and Canadian production, then there’s no need to discount prices to get it there.

Based on that line of thinking, we expected an above-average build in Midwest inventory, and perhaps a below-average build in Gulf Coast inventory. Apparently, our line of thinking was flawed. Not only did Midwest inventory decrease by 44,000 barrels, Gulf Coast inventory increased by 2.457 million barrels.

The average build in inventory on the Gulf Coast for week 32 of this year has been 556,000 barrels, so last week’s build was about five times higher than normal. Over the past five years, the highest week-32 inventory build has been 1.3 million barrels.

There were reports that the Nederland, Texas, export facility was having problems. Pricing for Mont Belvieu propane suggests something was up, with prices at Lone Star Transmission (LST) dropping to a discount to Enterprise (ENT). LST had been holding a premium of several cents. LST feeds the Nederland facility, so the drop in LST makes sense.

The issues with Nederland would certainly be a reason the inventory build on the Gulf Coast was so much higher than normal. But that doesn’t help our theory that inventory storage issues might be occurring on the Gulf Coast, and thus, we would see a backup of propane in the Midwest and Canada.

Based on the numbers reported by the EIA last week, one has to conclude that propane is still on the expressway south and that Mont Belvieu has the capacity to handle it, despite the drop in the price spread between Mont Belvieu and Conway and the high inventory level of 56.035 million barrels on the Gulf Coast.


A drop in Midwest propane inventory sent Conway up more than 8 percent for the week. However, total U.S. inventory was up more than 2.4 million barrels, and continued to march deeper into record territory. We went bullish on Conway last Wednesday after the Midwest inventory draw, but we could not keep the resolve to remain bullish with inventory so high.

The surprise at the end of the week for crude was the Obama administration allowing a crude swap agreement with Mexico. It is hard to determine this early what effect it will have on West Texas Intermediate (WTI) crude prices.

We are neutral on crude and propane to start the week.

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Last Week's Highlights
Both propane and crude surged to start the new week. Crude got support from a falling dollar. Conway led propane markets higher, as the discount to Mont Belvieu continued to shrink.
Crude experienced a major drop to a new low for the year, as China made moves to lower the value of its currency. Falling crude halted the upward momentum in propane.
The EIA reported a surprise draw in Midwest propane inventory, sending Conway propane prices up sharply. Mont Belvieu prices were pulled slightly higher by the run in Conway and higher crude, but a 2.4-million-barrel build in Gulf Coast inventory kept prices subdued. A 1 percent fall in the value of the U.S. dollar index provided the key support for crude. Inventory data for crude was not very supportive.
WTI crude fell to a fresh low for 2015, and propane prices followed along. A weak fundamental backdrop for both crude and propane is making it tough to keep rally attempts going. WTI crude set another low for the year.
Propane finished the week on an up note. Prices moved higher for the week, with Conway leading the way. This week was all about the draw in Midwest inventory that provided the impetus for a surge in Conway prices.

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