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MARCH 29, 2021 // THIS WEEK'S TOPIC: PRICE PROTECTION
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In last week’s Trader’s Corner, we discussed if it was a good time to buy propane for next winter. Next-winter swaps have now fallen to under 80 cents. We know it's hard to pull the trigger on 75- to 80-cent propane for next winter. It just seems like there will be a point during the summer when a better price could be found.
Today, we are going to discuss two trends in propane fundamentals that would warrant some caution about buying for next winter. Both of these trends are on the supply side. First, let’s look at U.S. propane/propylene production.
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Chart: Cost Management Solutions. Click to expand.
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So far this year, U.S. propane/propylene production has run 83,000 barrels per day (bpd) less than during the same 11 weeks of last year. But that number is misleading because it is skewed by the winter storm that crushed propane/propylene supply for a couple of weeks. Instead, let’s focus on the fact that propane production has set new five-year highs for six of the 11 weeks of the year.
This is quite remarkable given that production from oil and gas wells, the source of propane supply, is down. We believe strong propane production is due to a backlog of Y-grade (a mixture of natural gas liquids) that occurred due to a shortage of fractionation capacity over the past few years. That shortage has been resolved, and the new fractionation capacity is allowing the Y-grade backlog to be processed.
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This may be giving us a false sense of propane supply security. Nevertheless, in the short run, propane production at such high rates could help propane inventory recover this summer. We are already seeing some of that impact. Propane inventory was 23 million barrels lower than last year four weeks ago and is now just 18 million barrels lower.
U.S. refineries provide about 14 percent of U.S. propane supply, and they are still running well below capacity. As the economy improves, refinery throughput should pick up, especially during the summer months, which would add a little more to propane supply.
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Chart: Cost Management Solutions. Click to expand.
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We have also seen a shift in propane imports. Canadian producers showed little interest in shipping to the U.S. last year and let inventories accumulate instead. They have been much more aggressive in sending propane to the U.S. in 2021.
Through the first 11 weeks of this year, U.S. propane imports have averaged 179,000 bpd. That is 30,000 bpd higher than the same period last year. New five-year high import rates have been set for two of the 11 weeks.
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With U.S. domestic demand starting to slow, higher propane supply caused the first inventory build of the year to occur for the week ending March 19.
As long as propane retailers are seeing robust propane supply, a little caution about purchases is warranted. That doesn’t mean a layer of price protection here or there isn’t justifiable, but one may not want to go all-in.
Crude prices have come down recently, helping take some of the pressure off propane prices, especially in the months further out. It would be nice to see crude prices stay under control while propane supply remains robust. That would give us the best chance of seeing more downward pressure develop on propane prices.
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In any case, when you are considering a propane purchase, be sure to check the trend in U.S. propane production and imports. If they remain high and inventory levels are improving relative to last year, then be more conservative in acquiring price protection.
At the same time, if propane supply starts slipping compared to last year, it could be a sign the Y-grade backlog is depleting. In that case, it would be wise to be more aggressive in locking down next-winter prices.
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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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