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JANUARY 27, 2020 // THIS WEEK'S TOPIC: PROPANE PRICING
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In recent weeks, Trader’s Corner has looked at the reasons for the ultralow price environment that has developed for U.S. propane prices. We have explored what happened with propane prices during 2015 and 2016 when fundamental conditions were similar. Then we looked at how and why propane prices rebounded from January 2016 through October 2018.
Image: Cost Management Solutions Click to expand.
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Propane retailers that saw the opportunity created by the low-price environment in 2015 and 2016 and acted upon the opportunity put themselves in a fantastic position that added a lot to their bottom line over the next three years. It is not surprising then that many retailers are asking themselves if the same opportunity is present again.
To be sure the fundamental conditions that have driven propane prices lower are still present. It is probably still too early to commit to longer-term speculative positions in propane. Anyone that has speculated by going long propane since October 2018 knows the pitfalls of being long propane too early. But as we have discussed the opportunity may be upon us well before the changes in fundamentals are blatantly obvious. In fact, as we will point out below depending on a retailer’s individual market conditions the opportunity may already be here. As we pointed out propane inventories were still rising when propane retailers started taking long-term positions in propane in January 2016.
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There are signs that the fundamental conditions that caused the rapid growth in propane supply that is the root cause of the current downtrend in prices could be changing. The huge increases in propane supply are the direct result of massive drilling programs for crude oil and natural gas, primarily in shale formations. Through the week ending January 17 there were 673 active rigs drilling for crude in the United States. That is down 179 from a year ago. There were 120 active rigs drilling for natural gas, down 78 from a year earlier.
U.S. production companies, especially those that operate primarily in shale formations, have announced reductions in capital spending programs as they respond to a need to provide returns to investors as they see investment dollars dwindling. Producers were drilling wells at such a rapid pace an inventory of wells that were drilled but uncompleted reached 8,473 in May 2019. Finally, the slower drilling rates are causing that inventory to decline, falling by 900 to 7,573 over the last 7 months.
The Energy Information Administration (EIA) expects natural gas production to continue to rise this year but is predicting a small decline in 2021. Currently natural gas has fallen to under $1.88 per mmBtu and several major oil companies have announced multi-billion dollar write downs of the value of their natural gas assets. Keep in mind that natural gas was over $13 per mmBtu before the “shale gas revolution” began. The current price is not conducive to more drilling. Just this week the EIA projected that U.S. production of natural gas from shale formations during February will be up just 0.1 billion cubic feet. That will be the smallest rate of growth since January 2019. The growth in crude production will be up 22,000 bpd next month from shale formations, the smallest gain since last February.
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About Cost Management Solutions
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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