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JULY 13, 2020 // THIS WEEK'S TOPIC: PROPANE PRICES
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Chart: Cost Management Solutions. Click to expand.
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Propane prices made a major recovery from mid-March through early June, but the rally has stalled.
Early in the year, propane prices were on a steep decline. At the beginning of the year, total U.S. propane inventory was more than 19 million barrels higher than it was at the start of 2019. The excess inventory drove prices down at Mont Belvieu from around 45 cents to start the year to a low of 20.75 cents on March 23.
When governments started sequestering to try and slow the spread of COVID-19, the demand for energy plummeted. What was bad for energy overall was good for propane prices. With energy demand low, crude prices plunged, causing producers to shut in production. The result was that propane supply dropped more than propane demand.
The massive inventory position that was setting new five-year highs in February and March started coming down quickly. By June, the 19 million excess barrels of 2019 inventory were gone, with 2020 inventory essentially even with where it was in 2019.
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Chart: Cost Management Solutions. Click to expand.
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The elimination of that inventory excess saw propane prices recover to a year high of 53 cents on June 5. But in recent weeks, inventories have built at a higher-than-normal pace. By the latest Weekly Petroleum Status Report from the Energy Information Administration released on July 8, U.S. propane inventory was 4.535 million barrels higher than last year.
A rise in crude prices to around $40 per barrel caused shut crude wells to be brought back into production. Consequently, propane production increased.
Rising propane production resulted in larger inventory builds. As traders saw production increasing and inventories building, their enthusiasm for buying propane waned, and prices flattened due to lower demand. The above chart shows that since prices hit their highs on June 5, they have been in a general downtrend.
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Chart: Cost Management Solutions. Click to expand.
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As propane production began to increase in May, propane exports, which are key to balancing supply and demand, went into a lull.
After setting new five-year highs in just about every week of the year from January to mid-April, propane exports dropped off well below last year's rates – until recently. Last week, exports surged 206,000 barrels per day (bpd) to 1.333 million bpd, a new five-year high for week 26 of the year.
So propane markets find themselves at a crossroads. Crude prices have plateaued at around $40 per barrel. Our contention is that it will be hard for prices to move much past that mark under current conditions, especially since energy demand could decline, with more COVID-19 cases forcing governments to rethink opening up economic activity. It could be a while before propane sees much support from rising crude prices.
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Chart: Cost Management Solutions. Click to expand.
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At the same time, last week saw a recovery in propane exports and a decline in propane production. Should the lull in propane exports end or the gains in production stall or reverse, propane fundamentals could suddenly become more supportive. Right now, it appears that any upside in propane prices is going to come without the help of crude. That means price direction is going to be determined by propane fundamentals in the short term.
Will production fall more or at least level out? Will exports become robust like they were at the beginning of the year and last week, or will they go back into the doldrums seen between mid-April and mid-June? With Canadian inventories building, could imports from Canada improve? They jumped last week after being subdued most of the year. As propane buyers stand at a crossroads, these are the questions we should be asking.
It is going to take more data to get a feel for how to answer those questions. In the meantime, propane buyers are going to tend to stay on the sideline. That caution is going to make it difficult for propane to gain in value to crude. If crude prices are essentially stuck around $40, propane prices are going to likely stay near the 50-cent mark in Mont Belvieu and Conway until the questions above have answers.
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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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