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Trader's Corner - Presented by LP Gas. Propane Market Insights from Cost Management Solutions
Establish criteria to identify buying opportunities
Retailers looking to buy at the lowest price of the year never do. Retailers that buy when the market presents them with a good opportunity sometimes buy at the lowest price of the year. If you are a regular reader of Trader’s Corner, you may have heard us say something similar in the past, but it is a truth worth repeating.

When do we know the price bottom for the year has been put in? At the end of the year when we look back and see where the lowest price of the year was and not a minute before.

Logically, here is the reason you can never buy at the lowest price of the year if that is your goal: On the day the lowest price of the year is hit, will we know it at that moment? Not unless we have some rare power. Since the low for the year was just hit, the next-day prices will certainly be up. We can’t buy then because we know for sure that is not the lowest price of the year.

As prices depart further and further from that low, the buy-at-the-lowest-price-of-the-year buyer is stuck. That same buyer will then often buy near the highest price of the year in panic.

However, retailers that evaluate current market conditions and establish buying criteria based on that educated evaluation of the market just may find, at the end of the year, that they did indeed capture the lowest price of the year.
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Let’s see how that might work by establishing one simple propane-buying criterion for this coming winter and then evaluate if it is reasonable.

During the winter months of October 2020 through March 2021, Mont Belvieu propane had an average daily price of 73.74 cents and Conway 73.57 cents. Would buying propane for the upcoming winter at or near the price it averaged during the winter just completed be a reasonable goal? Here is where the educated evaluation comes in. Let’s look at market conditions now compared to last winter to help us evaluate if this is a reasonable buying criterion.

The price of crude is the key factor that traders use to establish the value of propane for future months. Propane’s own fundamentals will have a greater impact as those months draw near, but when looking further out, it is crude futures prices that have the greatest impact on propane futures prices. Thus, when evaluating the price of propane in the futures months, we need to do it relative to crude’s price.
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During the winter of 2020-21, West Texas Intermediate (WTI) crude averaged $49.25 per barrel. Its current price is $63.40. Crude currently has an average price of $60.92 for this coming winter. Below is a survey of industry analysts providing their estimates of what crude will average during 2021, 2022 and 2023.

Chart: Cost Management Solutions
Chart: Cost Management Solutions. Click to expand.
Thirty-seven top analysts believe WTI crude will average $59.72 this year, and 35 believe it will average $59.93 next year. These analysts’ estimates, the current price of crude and the price of crude futures in the winter months are all significantly higher than what WTI crude averaged during this past winter.

Comparing crude’s current price, winter price and forecasted price to last winter’s crude price would suggest that a price for propane this upcoming winter should be significantly higher than last winter’s price. Currently, a strip of swaps for October 2021 through March 2022 Mont Belvieu LST is pricing around 76 cents. The same for Conway is about 79 cents. That is only about 2 and 5 cents higher than last winter, respectively.
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The analysis of crude suggests the buying criterion of last winter’s average propane price is sound. Applying that to current market conditions would suggest propane is fairly priced relative to that criterion. Let’s look at some other data points to extend the evaluation.

U.S. propane inventory closed 2020 7.042 million barrels less than where it finished 2019. Inventory got as much as 24.641 million barrels below last year in February 2021 and is currently 16.192 million barrels less than last year at this time. This data suggests buying propane near, at or below last year’s average propane price is a good criterion.

A new 25,000-barrel-per-day (bpd) waterborne export facility has just been completed in Canada. This increases the chance that Canadian exports to the U.S. will be at or below last year. This fact supports our buying criterion.
LP Gas staff
Winter 2020-21: Lessons to learn about supply and pricing
In this video, Mark Rachal explains the factors that contributed to upward pressure on propane prices during the 2020-21 winter. Learn what made this heating season unique.

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Energy prices were driven down leading up to last winter because of the pandemic. Vaccines for COVID-19 have been developed and are being administered. This increases the chances for better economic conditions and higher energy demand in the coming winter when compared to last year. This fact supports our buying criterion.

The current U.S. administration is considerably more adversarial toward domestic hydrocarbon production than the previous administration, which could make crude and natural gas production more expensive. Currently, U.S. crude production is down 2 million bpd below its peak. Communications from U.S. producers suggest they will not significantly change capital spending programs until the end of the year. This could keep U.S. production subdued. U.S. natural gas production is below last year and is projected to improve only to last year's levels later this year.
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Domestic propane production has outperformed its sources (crude and natural gas production and refinery throughput) since the pandemic, likely because of a buildup of Y-grade. It is possible the excess supply of Y-grade could deplete, causing the growth in propane production to slow or even decline. These facts and possibilities support our buying criterion.

The U.S. is in negotiations to reenter the Iran nuclear deal. If completed, it could result in 2 million bpd or more of Iranian crude pushed into the global market. That possibility does not support our buying criterion.

U.S. propane exports are running strong, having averaged just 72,000 bpd less to this point in 2021 than during the same period last year – this despite significant disruptions in exports during the winter storm and the closing of the Suez Canal. Exports have averaged 1.144 million bpd through the first 15 weeks of this year compared to 1.216 million bpd during the same period last year. The outlook for exports remains strong, driven by economic recovery from the pandemic. This data point supports our buying criterion.
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Of course, there is plenty of other data to consider. However, a propane buyer could feel fairly confident in following a buying criterion of owning next-winter propane near, at or below last winter’s average propane prices of 73.74 cents Mont Belvieu and 73.57 cents Conway.

Owning a strip of winter propane at current values represents an opportunity for propane buyers. The lowest price for propane this year was put in on April 14 at 77.25 cents Mont Belvieu and 71.75 cents Conway.

Current prices are not that far removed from those values. Winter propane averaged around 80 cents for weeks but, as mentioned above, are below that level currently. Again, this pullback may represent an opportunity.
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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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