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DIGITAL EDITION
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THIS WEEK'S TOPIC:
PROPANE SUPPLY AND DEMAND
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Petrochemical companies increase propane usage
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This past week, the Energy Information Administration (EIA) reported a surprising 617,000-barrel draw on U.S. propane inventory. Industry analysts expected a build of about 700,000 barrels, which would have been in line with the 713,000-barrel build in propane inventory that week 38 of the year has averaged over the last five years.
Propane production, which we discussed last week, remained below last year’s levels for the third week in a row. Decreased production, as well as high exports, is contributing to tighter propane supplies. However, a week-to-week increase in domestic demand, from 975,000 barrels per day (bpd) to 1.244 million bpd, was the key reason for the draw in propane inventories for the week ending Sept. 18 – the week reported by the EIA on Sept. 23.
A key reason for increased domestic demand for propane is increased propane consumption by U.S. petrochemical companies.
If we consider the propane supply/demand inputs, the equation would look something like this:
Supply = Demand
or
Production + Imports = Demand from Retail (crop drying, home heating, commercial) + Petrochemical Consumption + Exports
Recently, inputs from the supply side of the equation have been overweight, causing propane inventory to increase to a record high of 97.7 million barrels.
The result, of course, was to drive prices lower. Prices will always adjust to rebalance the inputs into the equation. We are starting to see low prices decrease production. Production over the last three weeks has been below the same week last year. Production below the previous year had not occurred for years prior to this three-week stretch.
Lower prices have increased petrochemical consumption. Lower prices have also resulted in more projects to increase U.S. export capacity. Some of those projects will be coming online later this year and early next year.
The time lag between lower prices leading to lower production and higher export capacity has been the key reason that propane inventories have risen. Now that the markets have had time to adjust to the low-price situation, the inputs into the equation should become more elastic, meaning the market will have the ability to adjust more quickly to price changes.
(continued below)
Limitation on the demand side of the equation, specifically limited export capacity, prevented propane markets from functioning properly.
Balancing propane from the supply side can be challenging. Propane supply comes from refineries and natural gas processing. Refiners give no weight to propane values when deciding on refinery throughput. So refiners are overproducing propane – a byproduct of the refining process – when demand for gasoline and distillates is high, which it has been.
Natural gas producers consider the entire value of the natural gas stream in determining their drilling activity. The decline in value of the entire natural gas stream has affected drilling activity, not just propane’s value. Rigs drilling for natural gas in the U.S. have dropped to 198 from 329 at this time last year. The focus has been to drill for liquids-rich natural gas, which has limited the fall in natural gas liquids supplies. Still, the decline in drilling is finally starting to show up on the supply side of the equation.
Therefore, we project that propane’s relative value to crude will move closer to the five-year average of 53 to 55 percent of West Texas Intermediate (WTI) crude over time. Propane dropped to between 20 and 24 percent of WTI crude over the summer. Currently, propane is valued between 42 and 44 percent of WTI crude.
It is our view that imbalances are being corrected, which will slowly lower propane inventory and support higher valuations. Propane inputs into the supply/demand equation will be allowed to function more dynamically and be more sensitive to price changes with increased export capacity. For example, lower production will increase prices, which will decrease petrochemical consumption and exports.
Indeed, propane supply should remain robust and limit the upside for propane, especially given the backdrop of relatively low and stable crude prices that are forecast for the foreseeable future. However, we think the ultra-low propane price cycle is near its end, especially in terms of its relative value to crude.
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WEEK IN REVIEW
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Propane prices moved up sharply at the start of the week and were supported later by a surprise draw in U.S. propane inventory. Prices held onto the gains to close out the week. Meanwhile, crude struggled to gain traction, with overall crude fundamentals bearish.
We are bullish propane and bearish crude to start the week. Seasonal factors should continue to support propane for a while longer. Most moves up in crude are seen as selling opportunities. The market bias remains bearish for crude.
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LAST WEEK'S HIGHLIGHTS
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A sharp rally in crude prices pulled propane prices higher. Crude traders were reacting to decreased U.S. crude drilling activity and a decrease in Saudi Arabian crude production.
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Propane prices continued to move higher despite a retrenchment by crude. Overall concerns about the global oversupply of crude had traders selling into Monday’s rally.
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Propane prices separated from crude and posted solid gains on the back of a 617,000-barrel draw in U.S. propane inventory. Crude prices dropped sharply as a build in gasoline inventory more than offset a drop in crude inventory. The Organization of the Petroleum Exporting Countries (OPEC) reiterated it would not back off of its plan to become the world’s baseline crude producer and leave the job of swing production to higher-cost crude projects. Essentially, OPEC is getting out of the oil supply/demand balancing business and letting market forces determine what oil gets produced.
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Propane prices slipped despite a rebound in crude prices. Crude traders shook off bad U.S. economic news and did some opportunity buying after a sharp two-day decline in WTI crude that lost nearly 6 percent of its value.
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Crude and propane posted gains to close the week. It was a very strong week for propane, but crude struggled to break out of its downward price channel.
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CONNECT
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WHAT IS COST MANAGEMENT SOLUTIONS?
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The Propane Price Insider is an email service that provides:
- Three daily price Flash Wires
- Periodic option quotes
- Wednesday inventory data updates around 11 a.m. ET
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Evening report with executive summary, weather maps and complete review of energy prices that are based on propane's Btu equivalent
For a free 10-day trial subscription by email, sign up online here or call 888-441-3338.
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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.
Contact us today to see if you can benefit from having the Energy Price Watchdog working for you.
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