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SEPTEMBER 21, 2020 // THIS WEEK'S TOPIC: CRUDE & PROPANE PRICES
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Chart: Cost Management Solutions. Click to expand.
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Since our last Trader’s Corner, crude and propane prices have posted a significant rebound.
The chart plots Mont Belvieu LST, Conway and West Texas Intermediate (WTI) crude’s recent price histories. During July and August, Mont Belvieu LST propane was in a shallow uptrend. Crude was in a slightly stronger uptrend, while Conway propane was drifting slightly lower.
Conway was weaker due to the growing expectations that the crop drying season would not be strong, requiring the need to push more barrels to the coasts for export or petrochemical consumption. Movement of product between regions requires a differential to cover transportation costs.
Mont Belvieu LST fundamentals were not particularly supportive, but prices were pulled higher by rising crude. The assumption that demand would slowly improve as the global economy recovered from shutdowns related to COVID-19 pushed crude higher.
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Also, governments and central banks were providing a lot of economic stimulus measures to help counter some of the negative impacts of COVID-related shutdowns. The U.S. was the most aggressive, announcing aid packages in the trillions of dollars. To do that, the government went into more debt, driving the value of the dollar lower. A lower dollar generally results in higher prices for commodities, including crude.
By September, it was obvious that the economic recovery was stalling. The U.S. government was in gridlock in efforts to provide more stimulus to keep the upward momentum going. Suddenly, the assumption of a steady uptick in crude demand was no longer valid. A downward correction ensued, with WTI crude dropping $6.09 per barrel, or 14 percent. Mont Belvieu LST dropped 6.5 cents, or 13.4 percent. Conway fell 6.75 cents, or 14.36 percent. The downward correction bottomed out on Sept. 8.
For a few days after Sept. 8, both crude and propane treaded water, but prices ran sharply higher over this past week. Propane actually rebounded ahead of crude. Propane buyers had been sidelined for a while with propane fundamentals looking weaker. Inventories were setting five-year highs.
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But with winter approaching and pent-up demand present, the pullback in prices was simply too much for some buyers to pass up. As soon as it appeared that the downtrend had stalled, buyers started pulling the trigger. The result was a sharp rise in prices. The rally was aided by a surprise draw in propane inventory, which was reported by the Energy Information Administration on Sept. 16.
Crude’s rebound was slower to develop, but once it got going, the jump was just as sharp as propane. WTI was up 10 percent between Monday and Thursday, and appeared headed for another gain on Friday.
The reasons for the rally in crude were a bit cloudier than they were for propane. Hurricane disruptions to crude supplies were certainly in play. Crude markets were also anticipating positive developments from an Organization of the Petroleum Exporting Countries and its allies (OPEC+) meeting that was held on Sept. 17. OPEC+ focused on bringing all members into compliance with current production cuts, which stand at 7.7 million barrels per day (bpd). They also committed to meeting again in October if crude prices have not recovered to their liking by then. That news was enough to push crude through some technical resistance. A more bullish view on crude prices by Goldman Sachs also fed the rally later in the week.
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As we write, we find Mont Belvieu LST propane higher than our 50-cent-per-gallon benchmark and WTI crude just under our $42-per-barrel benchmark. Are the benchmarks still valid? For crude, we think the benchmark is valid. With due difference to Goldman’s bullish view, we still think the threat of a significant rise above our benchmark is still a ways out. If nothing else, the uncertainty of the U.S. presidential election is likely to keep investors cautious. We are certainly open to the prospect that WTI could move above $42 to the $45 range by the end of the year, especially if there is progress on COVID-19 treatments and vaccines, and the U.S. dollar remains weak. But for now, we still believe that any significant uptick in crude’s price will be reserved for 2021.
For propane, even though it is currently above our benchmark, we believe this to be more of a timing issue than any type of fundamentally significant change. Thus, we are not yet convinced our 50-cent-per-gallon benchmark for Mont Belview LST is too low. Another week like the one ending Sept. 18 might have us crying uncle on that call and raising the benchmark. But for now, we like the odds of the 50-cent benchmark holding up.
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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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