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August cover


The Cushing, Okla., crude build and its impact on propane supply buying decisions
Cost Management Solutions    
Cost Management Solutions
The Energy Information Administration (EIA) reported a build in Cushing, Okla., crude inventory for the week ending Aug. 14. Cushing inventory is critical for determining the value of West Texas Intermediate (WTI) crude prices - the U.S. benchmark for crude - because it is the settlement location for New York Mercantile Exchange-traded WTI crude futures.

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Cushing inventory had built to a record 62.2 million barrels in mid-April and dropped to 56.245 million barrels by mid-June. But inventory has been flat to higher since then, despite exceptionally high demand from refineries for crude.

There were expectations that reduced drilling activity in the United States would sharply reduce crude inventory - especially with U.S. gasoline demand at record highs - resulting in high capacity utilization and strong refinery throughput this summer. Indeed, U.S. crude production has fallen around 175,000 barrels per day (bpd) since June, but that reduction has been offset by imports primarily from Canada.

The build in Cushing crude inventory last week was just 326,000 barrels, but traders are fearful that it portends stronger builds this fall as refineries go down for seasonal maintenance. But perhaps the biggest fear factor is coming from the unplanned shutdown of BP’s Whiting, Ind., refinery, where a malfunction in a distillation unit could have the Midwest’s largest refinery down for months.
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Currently, Cushing crude inventory is at 57.439 million barrels. Whiting, when operational, consumes about 240,000 bpd of crude. In 60 days, just the crude being diverted from Whiting to Cushing would add 14.4 million barrels to inventory. That would put inventory right at 74 million barrels, which would be near Cushing’s capacity. We believe that Cushing capacity is around 76.65 million barrels, based on data we collected a couple of years ago, and actual working capacity may be less. We read recently that Cushing was 14 million barrels below its capacity, so these estimates seem in the ballpark.

Globally, crude fundamentals are bearish. We recently saw predictions of $30 crude and even some estimates of $14 crude. If Cushing crude inventory reaches its capacity this fall, it will certainly lend itself to those forecasts.

In some ways, all of this bearish talk for crude makes the propane supply buying decisions for propane retailers all the more difficult. It seems that many retailers are comfortable with the current price, and there is interest in owning propane futures not only for this winter, but the next two beyond this year. Retailers can buy October-to-March winter strips for the winters of 2015, 2016 and 2017 for around 44 cents, 50.5 cents and 55 cents, respectively.

Those numbers are very appealing and would likely work for most retailers. It is hard to imagine a price couldn’t be offered to customers based off those numbers that would not make them ecstatic. But when there is so much bearish news on crude, and propane inventory is approaching 94 million barrels, it is still hard to pull the trigger on purchases.


It was a bearish week for energy markets, but that could be said for markets in general. The Dow Jones Industrial Average dropped more than 700 points in two days of torrid trade.

Major concerns about the global economy that spun out of a flurry of bad economic news, especially from Asia, undermined investor confidence and sent commodities and equities markets into a tailspin.

We are bearish on crude and propane going into the week.

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Last Week's Highlights
The upward momentum for Conway propane that was strong on Friday waned to start the week. Mont Belvieu managed a small gain, even though a drop in crude prices was working against it. A fall in economic activity in Japan, the world’s No. 3 crude consumer, and a stronger dollar sent crude prices lower.
There was no change in propane prices, with both hubs closing at the same price as Monday. Propane was in the doldrums despite a rebound in crude prices. Although Brent crude was lower, WTI crude went higher on the expectation of a bullish inventory report on Wednesday from the EIA.
Crude prices plunged after the EIA reported a 2.620-million-barrel build in U.S. crude inventory that included a 326,000-barrel build in Cushing, Okla., crude inventory. A lighter-than-normal inventory build for propane helped propane prices resist the fall in crude, although both hubs posted a decline.
Propane prices continued to benefit from the light inventory build reported on Wednesday, with prices at both hubs up. Crude also managed a rebound with book squaring before the expiration of the September crude contract. The formation of Hurricane Danny, which is heading toward the U.S. Gulf Coast, provided support for crude as well.
WTI crude dipped below $40 before recovering to close at $40.45. Still, it was another low close for the year as weak Chinese factory activity weighed on markets. Propane was down, but continued to lag behind the drop in crude with a slowdown in inventory builds providing support.

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The Propane Price Insider is an e-mail service that provides:
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Unbiased Analysis

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.

Contact us today to see if you can benefit from having the Energy Price Watchdog working for you.

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