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August cover


How weather affects propane values
Cost Management Solutions    
Cost Management Solutions
Propane inventory has fallen 7.227 million barrels over the last three weeks. That compares to a five-year average decline of 4.402 million barrels for the same three-week period. The well-above-average drop makes one wonder what kind of inventory draws would occur if we had normal winter temperatures.

To put the three-week draw in an even better perspective, last year over the same time period, U.S. inventory only declined 813,000 barrels. In 2010, inventory declined 7.7 million barrels over the same three-week period, the highest decline dating back to 2003.

It seems reasonable that such a high rate of decline in inventory under such mild weather conditions would push propane prices higher despite the still-high inventory position. However, that has not been the case.

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The chart above plots Mont Belvieu propane’s relative value to West Texas Intermediate (WTI) crude. From midsummer to early fall, Mont Belvieu propane’s value relative to WTI crude improved from record lows despite the high inventory levels. Propane improved in value relative to crude with the promise of crop drying and winter heating demand.

Propane’s relative value slipped in October when crop drying demand for propane disappointed. However, after that setback, propane’s values once again started improving relative to crude. This improvement was not so much an increase in propane prices as it was propane not aggressively falling with crude in November and December. Propane trailed the fall in crude, primarily due to the hope of winter demand that the season encourages.

But it appeared last week that a lot of that hope faded as propane’s relative value to crude took a substantial dip. Propane markets have shrugged off the rapid decline in inventory that has occurred over the last three weeks. Perhaps the above-normal temperatures that have been prevalent throughout much of the nation have most propane players feeling like the propane draws are an aberration.

The reality is that the mild winter weather has now become the key driver for propane prices. For a while, propane prices were attached to crude, with daily percentage changes close for both. It was different last week. When crude rallied ahead of the Federal Reserve meeting, propane, despite the big inventory draws for support, did not follow. However, when the dead-cat bounce in crude ended and prices retreated, propane prices were quick to fall with crude.

The change in price action makes one think that there has been a change in attitude about propane’s pricing prospects. All of the hope that summer crop drying and winter demand would "set things right" in the propane world seems to have faded. Crop drying was a bust and this winter is well on its way to wearing the same moniker.

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The chart above is from the National Oceanic and Atmospheric Administration (NOAA). It shows the probability of above, normal and below-normal temperatures. If you are in the retail propane business, red is bad and darker red is very discouraging. In the highest propane-consuming areas of the nation, the probability of above-normal temperatures for the rest of this month ranges from 33 to 90 percent. Perhaps a new year will bring better prospects for colder temperatures.

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Unfortunately, NOAA is not giving propane retailers much hope after the New Year, either. The chart above is the temperature probability map for January, February and March 2016. Over that three-month period, the probability is between 33 and 60 percent that the higher propane-consuming areas will experience above-normal temperatures. Only parts of New Mexico, Texas and Louisiana are expected to see below-normal temperatures during that time. Those are hardly the high-consuming areas of the nation.

These temperature outlooks, along with the disappointments so far this fall and winter, are the reasons propane values are under pressure. The outlook certainly supports the potential for propane not to improve in relative value to crude and to set a fresh round of price lows for 2015 before the year is out.
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We must remind everyone of the steep inventory draws of the last three weeks. If those types of draws continue, even with the mild winter conditions, they could begin to drive propane prices more than current winter temperatures.

Be aware of the trend in inventory draws. If they stay above normal for the rest of December, which is certainly going to be mild, then consider your supply position for next winter more closely. If above-average draws continue for much longer under these conditions, it suggests something fundamentally has changed concerning propane supply and demand.

Don’t be lulled into a false sense of security by the low crude prices and mild temperatures currently present, especially if propane inventories somehow continue to decline at an above-average pace for the remainder of this year. If these above-average draws continue, retailers should seriously consider having longer propane supplies going into next winter, and even beyond, than they had going into this winter.


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