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JANUARY 3, 2022 // THIS WEEK'S TOPIC: PROPANE PRICES
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You want to know what propane prices are going to do for the remainder of winter. If someone could just tell you what propane prices are going to do for the next three months, decision-making would be much easier.
Chart 1: Cost Management Solutions Click to expand.
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We are not going to pretend that we can predict what propane prices will do, but we can provide some data that will help with the strategies and decisions you must make.
We all focus on inventories, so we started by comparing our current inventory position to the previous nine years. In Chart 1, notice that during three previous years, inventory at the end of the calendar year was almost exactly where it was at the end of 2021. Hot dog! All we have to do is look at those three years, and they will surely give us a trend for propane prices when inventories are at this level.
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We put together Table 1 expecting to see very similar pricing between 2012, 2017 and 2018. Disappointed! From the end of calendar year 2012 to March 2013 (end of winter), propane prices increased 5.83 percent. From the end of calendar year 2017 to March 2018, propane prices decreased 17.5 percent. The change in price from the end of 2018 to March 2019 was an increase of 0.39 percent. It's hard to see much of a pattern there.
Table 1: Cost Management Solutions Click to expand.
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We also noted that propane inventory has declined three years in a row, counting 2021. You would think declining inventory would mean higher propane prices, which we are experiencing this year. Yet, the same downtrend in inventory was occurring before 2017, and as we see in Table 1, propane prices essentially crashed in the first quarter of 2018.
It doesn’t appear that end-of-year inventory levels or trends in year-to-year inventory changes give us much guidance on what to expect from propane prices over the next three months. It could never be that easy, could it?
What next? We all know that crude’s price has a tremendous impact on propane’s price. Eureka! Let’s compare the change in crude’s price from the end of the year until the end of March and see if it correlates with propane.
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In six of the last nine years, propane and crude’s price moved in the same direction through the second half of winter. That helps, but there were still some discrepancies. For example, in the first quarter of 2019, crude was up 32.44 percent compared to propane’s 0.39 percent – not exactly a strong attachment, even though they did move in the same direction. And when they went in opposite directions, it was significant. From the end of 2013 through March 2014, propane was down 15.94 percent, and crude was up 3.21 percent. The difference was about the same in the first quarter of 2018. So, we get a little help from crude and propane’s price relationship, but it's hardly ironclad.
Aha! It's going to be about the severity of winter. We can check how much inventories decline from the end of the calendar year until the end of March. If inventories decline at an above-average rate, then propane prices will move higher, and if the inventory draw is below average, prices will decline. This is so obvious. Why didn’t we look at this right away? Sometimes, we tend to make things more complicated than they need to be.
Over the past nine years, the average drawdown in inventory in the second half of winter has been 28.716 million barrels. In that time, inventories have declined at a below-average rate five times. Propane prices increased in three of the five. In four years, inventory declined at an above-average pace, and propane prices decreased in two of the four. In fact, during the first quarter of 2017, when propane inventory saw its largest decline – nearly 43 million barrels – propane prices dropped 17.9 percent.
Surely, we have entered into some alien universe where nothing is logical or grounded in reality. No, not really – we have simply entered the world of propane pricing.
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We do not want to send you off into the new year thinking there is nothing to glean from the information we gathered. We think there is a lot of good stuff here, actually. First, simply note the end-of-year price compared to the end-of-March price. There has been an average decrease of 3.29 percent.
Second, note the average propane price at the end of the year: 72.76 cents. There are three years when the price is significantly below the average, and price went up in two of the three. The exception was the pandemic year.
There were three years when the end-of-year price was significantly higher than the average, and prices went down in two of those years. In the year it went up, 2013, it was by just 5.83 percent, and it took rising crude prices and an average inventory draw to help it happen. Also, 2013 had the lowest inventory level of any of the years in the study, so the overall erosion in inventory was in play there. At the end of 2013, propane was at 126.25 cents because of this low inventory, but by the end of winter, it was down 15.94 percent. At the end of 2017, propane was at 97.75 cents, and by the end of winter, it was down 17.9 percent.
The takeaway is that when propane prices are above average at the end of the year, the odds favor they will lose value by the end of winter. At 113.25 cents, the current price is well above the average this year, so we really need to be cautious with the way we manage risk to higher prices. If you are going to be bullish and go long, make darn sure crude prices are rising and weather is supporting you. Be prepared to close down the position if you lose either of those supports.
Propane is in an uptrend now, so we can still use short-term buys to manage upside price risk, but be cautious about too long too far out at this point.
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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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