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MARCH 6, 2023 // THIS WEEK'S TOPIC: PROPANE AND PROPYLENE PRODUCTION
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Chart 1: Cost Management Solutions Click to expand.
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In January, we wrote a four-part series exploring factors that might change the trend in propane inventories. Propane inventories had been growing at a remarkable clip going from near a five-year low in August 2022 to a five-year high by the end of the year. The series kicked off with a focus on refinery propane production. Refiners can tweak their processes to make more refinery-grade propylene with the offset to produce less fuel-use propane (HD-5) needed by propane retailers. With propylene prices high compared to fuel-use propane, the longer trend had been for refiners to make more propylene and less fuel-use propane. That trend changed in 2022.
We pointed out that a change in the inventory trend from growing to declining could come from small changes that add up to big differences in fuel-use propane supply over the course of the year. One of those being refineries reverting to their long-term trend of making more propylene. We pointed out that just a 10,000-barrels-per-day (bpd) shift in that direction would make a 3.65-million-barrel difference in fuel-use propane supply, representing 24 percent of the build in propane inventory that occurred last year.
The official data on refinery production of propylene and fuel-use propane comes out three months in arrears. So, when we were writing that article in January, the latest data for propylene production by refiners was for October. Chart 1 shows what the refinery propylene production chart looked like then.
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Chart 2: Cost Management Solutions Click to expand.
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Chart 2 shows the latest data through December.
There has not been a huge recovery in propylene production, but we do see that the trend to make significantly less propylene ended after October. The 224,000 bpd of propylene production in October could represent the low watermark. Production increased by 10,000 bpd in November but dropped by 5,000 bpd in December.
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Chart 3: Cost Management Solutions Click to expand.
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Chart 3 is the corresponding chart for fuel-use propane production.
There was a 26,000-bpd drop in fuel-use propane in December, but we think that was more weather related. The severe cold during that period hurt refinery output along with production at just about every other part of the energy supply chain. So, don’t be too worried about this drop in December fuel-use propane supply at refineries. However, that does not take away from the trend change in propylene production that happened in November, before winter weather had its impact.
Chart 3 shows that fuel-use propane production was up from October to November, even as propylene production increased. So, no worries at that point.
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Chart 4: Cost Management Solutions Click to expand.
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Chart 4 shows total refinery throughput of crude.
Look back at the blue line for 2022 and note the big drop in the amount of crude processed by refineries in December. Again, this accounts for the big drop in fuel-use propane that month. But it doesn’t change the fact that the drop in propylene production appeared to end before then. Had it not been for the December weather, there would have likely been another increase in propylene production that month.
But also note in the refinery throughput chart that throughput is still running below normal well after the impacts of the December storm. The weaker throughput negatively impacts both propylene and propane production. There will be some seasonal maintenance that may keep throughput down for a while longer. What we will want to take note of is how propylene versus fuel-use propane production trends as refineries increase throughput during the summer driving season. Though the weather impacts make it difficult to assess, there was certainly some indication that a shift to more propylene output may be underway by refiners.
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Right now, everyone seems very bearish about propane prices this summer and with good reason. Inventory is near five-year highs for this time of year. But remember, last year at this time the industry was very bullish about propane prices, again with good reason. Inventory was setting five-year lows. But high propane production and weak domestic demand conspired to completely flip the supply/demand picture, and propane inventory finished the year at five-year highs for the month of December.
We don’t know how this year will turn out. The current bearish sentiment is not unwarranted and may turn out to be exactly how the pricing environment remains throughout this year. What we do know is the market tends to be very efficient in dealing with imbalances in supply and demand. In our analysis, we look for factors that make a year different from its predecessor or show why conditions turn out so differently than expected. We then look at how the market is adjusting.
Monitoring how refineries balance fuel-use propane production and propylene production could reveal an important piece of the propane inventory puzzle.
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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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