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MARCH 2, 2020 // THIS WEEK'S TOPIC: PROPANE INVENTORY
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Propane buyers are always looking for the best time to hedge future needs. When prices are as low as they are now, it seems like a good time to consider buys, but propane fundamentals still don’t look very supportive.
As we have recently shown, propane inventory is on track to set an end-of-winter high of around 70 million barrels this year. If inventory builds on par with what it did last summer, it could begin next winter at a record high of 120 million barrels. A propane buyer should know before setting a price on future propane supply that such a bearish scenario could change.
New propane supply grew at such a rapid pace that the focus was mostly on U.S. propane exports as a counterbalance. But, there are signs that propane supply growth won’t be as high this year compared to the past few years.
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It's still early, but that is big news given the seemingly unstoppable growth in propane supply. There is normally a decline in domestic propane production during the early part of the year. That appears to be related to winter cold affecting natural gas production, so we don’t want to read too much into this year’s decline.
Image: Cost Management Solutions. Click to expand.
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Nonetheless, production opened the year at 2.435 million barrels per day (bpd). It fell to 2.139 million bpd for the week ending Feb. 21. That is a 296,000 bpd, or 12 percent, drop. In 2019, production opened at 2.090 million bpd and was at 1.973 million bpd in late February, a 117,000 bpd, or 5.6 percent, drop.
Obviously, most supply comes from domestic production, so following the trend above will be a key focus all through the summer. Propane imports, however, are part of the supply side as well, so we need to be apprised to what is going on there. There have been some very interesting developments on that front.
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U.S. propane imports come from Canada. Over the last two weeks, imports have set new five-year low marks for their respective weeks of the year.
Image: Cost Management Solutions. Click to expand.
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There was a major spike in imports four weeks ago, but imports have averaged just 160,000 bpd this year compared to 204,000 bpd during the same time frame last year.
There is a good chance Canadian imports to the United States could remain low for a while.
Canadian propane inventory in January was easily setting a five-year low. Inventory was just 2.805 million barrels, compared to 5.308 last year and a five-year average of 5.672 million barrels. Such a low level of inventory would suggest that the new waterborne export facility on Canada’s west coast is having an impact.
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The 43,000 bpd that imports are down this year over last year during January and February may not seem that significant given the overall domestic production and import numbers. However, 43,000 bpd between now and the start of next winter could drop nearly 9 million barrels from next winter’s start-of-winter inventory position.
That would still be over the previous record start-of-winter inventory position of 106 million barrels, but the likely difference in propane’s price between 111 million barrels and 120 million barrels to start the winter would be significant because it would mean inventory built less over this summer than last summer.
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We are certainly not predicting Canadian imports will remain that much below last year over the summer. However, we are saying the current trends suggest fundamental changes are afoot. Buyers shouldn’t get locked into a static opinion about propane fundamentals even as bearish as they are right now. Conditions could change, and buyers need to monitor data and be prepared to respond.
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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