Trader's Corner - Presented by LP Gas. Propane Market Insights from Cost Management Solutions
Setting expectations for
next-winter pricing
Propane prices are seeing a little more volatility in the later stages of winter.

CMS Chart
Chart 1: Cost Management Solutions Click to expand.
Chart 1 plots propane closing prices at Mont Belvieu ETR and Conway. It shows the strong run higher in prices to close out January, followed by a pullback at the first of this month and now a rebound attempt.

As we have documented in previous Trader’s Corners, the average price on the last day of March since 2013 has been 69.5 cents. When prices are elevated as they are now, there is a lot of pressure to move toward the average as winter demand wanes. The average winter starting price on Oct. 1 since 2013 has been 83.94 cents. Obviously, this illustrates that the best opportunity to obtain price protection for the upcoming winter often comes right at the end of the current winter.
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The end of winter for us is not March 31. It is defined by when propane moves from the inventory drawdown period to the inventory build period. Granted, when that occurs is dependent on more factors than just winter weather, but the end of winter heating demand is certainly the critical factor. Traders are starting to see the finish line on the inventory drawdown period. When that occurs, the downward pressure on propane prices intensifies.

Three times in the last 10 years, the low inventory position of the year was posted during the first week of March. Three times it has occurred in the third week of March and once in the fourth week. Three times the low inventory was posted during April, with latest occurring the last week of that month.

The odds favor that the low inventory position of this year will be put in sometime over the next seven weeks. Over the 10-year period, the average inventory drawdown has been 15.661 million barrels from now until the low inventory level for the year is set. The range has been a draw of 6.016 to 22.122 million barrels over the entire period.
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If inventory drops at an average rate until it begins to build again, the end-of-winter inventory level would be 34.091 million barrels. The average inventory position before the build begins has been 42.436 million barrels over the last 10 years. Plenty of inventory remains to get through the rest of this winter, but the odds favor a below-average inventory position when the drawdown period ends.

We have profusely warned against setting an expectation for propane prices to get to 69.5 cents by the end of this winter. We have warned against prices falling before the end of winter, thus the need not to get too long propane for the remainder of this winter. But we have called the hope for 69.5-cent propane a bridge too far. We have even said that if propane prices would happen to fall under a dollar toward the end of this winter, it would be a gift. The fact that this winter’s inventory position will be well-below-average, coupled with very high crude prices, works strongly against any type of major price correction in the short term.

More and more crude analysts are predicting tight crude supplies this year. Recent forecasts have crude demand exceeding 100 million barrels per day (bpd) for the first time since 2019. The International Energy Agency just set an expectation of a high of 100.6 million bpd, which would be a record. There are projections for $100 Brent crude, probably about $98 WTI crude this year.
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As we have shown, propane’s low value relative to crude is around 50 percent over the long term. At $91, the current value of WTI, if propane was valued at 50 percent (down from its current 57 percent), its price would be 108.33 cents. With propane inventory relatively low, and likely to finish the inventory drawdown near the lower end of the 10-year range, something exceptional would need to happen for propane prices to fall below 50 percent of the value of WTI crude. The high demand for crude is expected during the third quarter, just before winter. Should WTI crude be valued at $98 and propane at 50 percent of that, then the price of propane would be 116.67 cents. If propane inventories do not reduce their deficit to the average by then, and propane remains valued at 57 percent of WTI, the price could be at 133 cents.

We are not predicting that as a start-of-winter price. There are simply too many unknown variables to make such a prediction. However, we are definitely trying to set realistic expectations about the price environment we are in for propane. With crude prices and inventory positions where they are, we are in a bullish environment. We should be realistic when setting our expectations about where a good buy for next winter might be. Of course, we will want to closely monitor crude and propane fundamentals to see if their conditions get less bullish. But until then, a good buy for next winter might be higher than we would normally like to consider.
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At present, the market has the average price of propane from October 2022 through March 2023 valued at 113 cents. That is about 12 cents less than the current February price. If we were to be lucky enough for that spread to hold while propane prices fall in the next couple of months to say the 108.33 cents mentioned above, that would make winter propane valued at around 96 cents.

Again, lets review what it would take to get there:

  1. Crude prices must stay where they are now and not go up, as many predict.
  2. Propane’s value relative to crude would have to drop to 50 percent, even though current inventory positions are below average and likely to finish winter on the lower end of the 10-year range.
  3. The current price spread between now and winter would have to stay the same, even though the tendency will be for the spread to narrow as we get closer to next winter.
We are going to hope we can all get propane price protection for next winter at less than 96 cents. But we think the argument above would suggest that it might be justified to take a first layer of protection at any opportunity to own under a dollar per gallon for next winter.
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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