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DIGITAL EDITION

August cover


THIS WEEK'S TOPIC:
PROPANE INVENTORY

Propane inventory exceeds 100 million barrels to start winter
By MARK RACHAL
Cost Management Solutions    
Cost Management Solutions
Propane inventory is at a record high of 100.342 million barrels to start the winter heating season. The inventory position greatly exceeds last year’s record high of 81.862 million barrels.

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The current U.S. inventory position is 31.310 million barrels higher than the five-year average inventory position for the first week of October, making it 145 percent of the average.

Regionally, the Gulf Coast holds the bulk of the inventory.

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Gulf Coast inventory stands at 61.996 million barrels, which is 27.887 million barrels higher than the five-year average for the first week of October, making it 182 percent of the average.

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Midwest inventory is at 27.515 million barrels, or just 782,000 barrels higher than the five-year average for the first week of October inventory position. That puts Midwest inventory just 1 percent higher than the five-year average.

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The table above shows historic winter propane inventory changes. It begins with the highest inventory position to start winter and ends with the lowest inventory position at the end of winter.
(continued below)


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It is unlikely that propane inventories are at their high for this year, but we will assume they are for comparison purposes. Below are a few facts concerning the current inventory position:

  1. 18.730 million barrels – Amount current inventory exceeds last year’s record-high inventory position
  2. 53.744 million barrels – Last winter’s ending inventory position
  3. 27.868 million barrels – Last winter’s inventory draw
  4. 47.869 million barrels – Largest winter draw on inventory (2009-10)
  5. 18.076 million barrels – Smallest winter draw on inventory (2011-12)
  6. 52.473 million barrels – What inventory would be at the end of this winter if the draw matches the 2009-10-high draw
  7. 82.266 million barrels – What inventory would be at the end of this winter if the draw matches the 2011-12-low draw
  8. 63.211 million barrels – What inventory would be at the end of this winter if the draw matches the average of the last 12 winters
  9. 46.598 million barrels – The draw needed to match last winter’s record-high ending inventory position of 53.744 million barrels
  10. 68.687 million barrels – The draw needed to match the average end of winter inventory position of 31.655 million barrels
What the data shows is that despite being at a record-high level, propane inventory could end this winter below last year’s record-high end-of-winter inventory position. To do so, inventory would have to draw just short of its 47.869-million-barrel-record draw.

Given the forecasts of relatively low demand for crop drying and for above-normal winter temperatures, that type of draw is unlikely to occur. However, the wild card is the number of exports and propane production. As we have shown recently, propane production over the last few weeks has been running below where it was during the same weeks last year. Propane export capacity has also increased since last year. Petrochemicals are currently using more propane now than at this time last year.

It is still conceivable that even if this year’s crop drying and winter heat load is below that of 2009-10 (the winter of record-high drawdown on propane inventory), U.S. propane inventory could end this winter with less inventory than last winter. However, without strong crop drying and winter heat load, it is unlikely this winter’s ending inventory position will be much less than last year’s ending winter position, if at all.


WEEK IN REVIEW

Over the last week, crude has transitioned from being primarily driven by fundamentals to being driven by geopolitical events. Direct military involvement in Syria on the side of the Assad regime by Russia potentially puts it on a collision course with the United States. Russia’s stated objective was to help the Syrian government with its fight against Islamic State forces. In reality, however, it has been indiscriminate in attacking both Islamic State and Syrian rebel forces. This will potentially force the United States to abandon the Syrian rebels it has been supporting or chance a showdown with Russian forces for control of Syria.

Propane fundamentals remain very weak, but seasonal influences and strength in crude are driving prices higher. We went bullish both crude and propane during the week last week and will continue with that short-term outlook this week.

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LAST WEEK'S HIGHLIGHTS
Last Week's Highlights
Crude was up on talk of a meeting between the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC producers to look for ways to support crude prices. Propane continued to climb due to seasonal influences despite record-high inventory.
Mont Belvieu propane closed over 50 cents for the first time since May. Propane followed crude prices higher. Reports showing that crude exports from Iran will drop in October helped support crude. Geopolitical issues in Syria remained a key supporter, as did Russia’s comments to Saudi Arabia about ways to support crude prices.
The Energy Information Administration Weekly Petroleum Status Report contained data that was bearish for both crude and propane. U.S. propane inventory was up 1.6 million barrels, which was far more than expected and three times more than the average build for week 40 of the year. Crude inventory was up 3.1 million barrels and gasoline inventory was up 1.9 million barrels, slowing the upward momentum for crude.
Crude resumed its rally as geopolitical events in Syria trumped weak fundamentals as the driving force for crude markets. Propane also managed to rebound with crude, though it lagged the sharp run-up in crude prices. High inventory levels were a weight on propane, but seasonal influences continued to apply upward pressure on propane prices.
Crude failed to take out a technical barrier, which resulted in a round of profit taking at the end of the day. Propane was weak all day and could not follow crude higher.
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