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FEBRUARY 24, 2020 // THIS WEEK'S TOPIC: PROPANE DEMAND
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In last week’s Trader’s Corner, we discussed the large 6.172-million-barrel draw in U.S. propane inventory. That huge draw was followed by a 3.013-million-barrel draw in inventory. That is a decline of 9.185 million barrels of propane in just two weeks. But we really need to go back three weeks to set our topic in Trader’s Corner today. Three weeks ago, the Energy Information Administration (EIA) reported an extremely rare January build in propane inventory of 560,000 barrels.
Image: Cost Management Solutions. Click to expand.
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That build, followed by the large draw, had us conclude that an inventory reporting error was likely made during the week of Jan. 31. That error was corrected for the week ending Feb. 7, resulting in the very large inventory draw.
You may recall that associated with that draw in inventory was a massive jump in propane demand. Demand jumped from 1.242 million barrels per day (bpd) to 2.090 million bpd, an 848,000-bpd increase. Now keep in mind that increase in domestic demand occurred following a period of relatively mild temperatures.
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It is important to remember that propane demand is a calculated number. The EIA gets data on inventory changes, imports, exports and production and calculates what domestic propane demand would have to be to make the supply/demand equation balance. So, if inventory was overreported on Jan. 31, domestic demand would have been underreported. When the inventory was corrected on Feb. 7, it made it appear there was a massive increase in domestic demand that resulted in the oversized inventory drawdown.
Image: Cost Management Solutions . Click to expand.
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Again, our conclusion was that this was a simple reporting error one week that was corrected the next week, end of story. But another theory developed last week that we think is worth exploring. If that theory is correct, the story is not over and could have an impact on propane inventory builds for far more than one week.
Here is the hypothesis:
The large jump in domestic propane demand had nothing to do with retail propane; it was a result of activity in the petrochemical industry. The theory is based on propane becoming more economically viable as a feedstock for petrochemicals. Propane and ethane are the two main petrochemical feedstocks, but ethane is the primary feedstock.
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The theory was that economics reached a point where cracking more propane made sense. Thus, it was proposed that a large petrochemical company or companies moved propane from commercial storage reported to the EIA to their own proprietary storage not reported to the EIA.
Therefore, it was the massive movement of propane from commercial storage to petrochemical proprietary storage – to make it more readily available to these companies – that resulted in the big inventory draw of Feb. 7. If that theory is correct, the 848,000-bpd increase in domestic demand was correct and not overstated. It just happened to have come from the petrochemical sector rather than the retail sector.
If this hypothesis is true, then we might expect more propane consumption by petrochemicals for more than just one week. As we mentioned last week, the United States is on pace to end this winter with 70 million barrels – a record. Further, if inventory were to build by the same amount this summer as last, it would be at 120 million barrels to start next winter, easily eclipsing the previous high of 106 million barrels. We are looking for any suggestions that this won’t happen, and this could be one.
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Scientific methodology says that a hypothesis should be challenged so that its validity can be proven. Here are a couple of challenges:
The most obvious is that the hypothesis does not take into account the unusual build in propane inventory for the week ending Jan. 31. While we suppose it is possible petrochemicals could have sold product from proprietary storage that week and shipped it to commercial storage only to buy it back the next week, that seems highly unlikely. That means the unusual inventory build likely has to be explained as a separate anomaly unrelated to the petrochemical activity.
Second, industry data on petrochemical consumption of propane has yet to reflect a significant increase in interest in propane as a feedstock.
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Industry estimates are that petrochemicals will use 275,000 bpd of propane this month, up just 8,000 bpd from last month, which was already a low rate. Last month, ethane accounted for 77 percent of the feedstock stream, and propane accounted for 11.95 percent. This month, it is estimated ethane will account for 77.8 percent and propane 12.14 percent of the feedstock stream.
Granted, these estimates will be adjusted over the coming months and could eventually reflect a more significant increase in propane consumption by petrochemicals this month. March consumption estimates will be out soon, and that should give us a better indication if petrochemicals are indeed starting to favor propane more.
If they are, it would be a reason to think the inventory builds could be slower this summer. Keep in mind that from February to September of last year, petrochemicals consumed an average of 281,000 bpd of propane, so the consumption rate has to rise another 6,000 bpd just to reach that average. It would then have to average significantly more than 281,000 bpd through the summer to have a marked impact on this summer’s propane inventory build.
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Several weeks ago, we began a series of Trader’s Corners that explored how shifting propane fundamentals could lead to a greater balance in propane supply and demand. We continue to look for an indication that this theory is correct. As this analysis shows, it is still too early in the process to confirm it is true.
It is only prudent to assume propane inventory could build as much this summer as it did last, possibly leaving it at an incredible 120 million barrels at the beginning of next winter. That would be an extremely bearish case for prices, and current price risk management strategies should reflect that possibility. Nonetheless, we must continue to be vigilant in watching the data to see if a less bearish – or even bullish – case for propane prices is developing.
ANNOUNCING HEDGING SEMINAR: Please note that Cost Management Solutions will be conducting a two-day hedging seminar on March 19-20 at the Houston Airport Marriott. This seminar will provide tools and strategies for helping propane retailers navigate the changes in propane pricing in the coming months. Please contact Dale Delay at 888-441-3338 for more details.
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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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