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August cover


Why propane production leveled off this summer
Cost Management Solutions    
Cost Management Solutions
Total U.S. propane production fell below last year's rates over the last two weeks. This is a very significant development that we will need to watch closely. For more than two years, U.S. propane production set five-year highs each week. However, production began to level off in May and showed essentially no growth throughout the summer.

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There has been a significant number of refinery upsets that could have contributed to the decreased production over the last two weeks. If this downtrend in production continues to develop, it will be one of the most bullish fundamental developments for propane in a long time.

We have been saying for a while now that it is going to be very difficult to balance propane supplies from the demand side only. At some point, the production side will have to contribute to balancing supply and demand. Frankly, we are unsure if that point has been reached, and that is why we are interested in closely monitoring production in the coming weeks.
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While the dip in production over the last two weeks could be an anomaly, the flat trend over the summer was strongly established and breaks the long-running increases in propane production. Over the last six weeks, there have been a couple of weeks of increased production, but overall it looks as if a downward trend in propane production is developing. This could be one of the more concrete pieces of data that suggests the ultra-low price cycle for propane could be nearing its end.

There are a few people sounding caution about the Energy Information Administration's (EIA) production data, citing that it may be incomplete. Indeed, the official data lags the weekly estimates by two to three months. Even official monthly data backs up the change in the production trend that took place over the summer.

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Even if one believes the EIA production numbers are not comprehensive, the data still shows a decline in the production points from the EIA’s data.

In our view, the potential impact on propane pricing is the same regardless of whether there are gaps in the data from the EIA. The important thing here is not that the total production number accounts for every barrel of production, but rather that the data shows a developing downtrend in production.

Petrochemical use of propane is up about 150,000 barrels per day (bpd) from this time last year, and exports are certainly up year over year. After slowing in August, exports are forecast to strengthen in September. With more pressure from the demand side – should production continue on a downward slope – inventory could quickly decline at an above-average pace.

Input from retailers suggests that plenty of propane was distributed down the supply chain as retailers and their customers took advantage of very low spot gas prices this summer. If that is true, the drawdown inventory may not be dramatic in the early part of winter. However, we think that upward price risk will grow significantly in the later stages of winter if the current trends for petrochemicals, exports and production continue.


Propane prices were basically neutral for the week ending Sept. 18 and will see the same for the week of Sept. 21. For the first time in a while, we are seeing potential fundamental supports for propane, so it is hard to be entirely bearish despite the current state of inventories.

Crude is another story, and we will remain bearish in our outlook for crude. The Organization of the Petroleum Exporting Countries (OPEC) and other big producers are in a war for market share, and that war remains at full throttle. It is going to take a while for enough high-cost crude production to offset what OPEC is adding and clean up the crude oversupply. Further, there are risks to crude demand growth. The Federal Reserve warned of weakness in the global economy, sending commodities and equities lower to end the week of Sept. 18.

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Last Week's Highlights
Propane got off to a slow start as falling crude weighed on prices.
Crude and propane prices rallied to recover much of the loss posted on Monday. Despite rising, crude remained in a downward price channel.
Propane prices gained more than 3 percent following West Texas Intermediate's (WTI) higher crude prices. WTI rallied 5.74 percent. The EIA reported a draw in U.S. crude inventory, which was against expectations for a build. Crude markets seemed to key in on a 1.906-million-barrel draw on Cushing, Okla., crude inventory.
Crude slipped after the Federal Reserve gave comments about the global economy, which raised concerns for investors. The Federal Open Market Committee that sets monetary policy left interest rates unchanged. Citing concerns about the global economy and low inflationary pressures at home, it held off on raising rates.
Crude prices experienced an extended decline as OPEC gave indication it would stick with its strategy to let market forces balance markets. OPEC will continue to produce crude at a high rate and use its cost advantages to gain market share over higher-cost producers, even if it means a very slow recovery in prices. Warning from the Federal Reserve about the global economy continued to weigh on commodities and equities markets.

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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.

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