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Trader's Corner - Presented by LP Gas. Propane Market Insights from Cost Management Solutions
Part II: Surprising discovery about propane’s monthly average prices
CMS Table 1
Times When Lowest Monthly Price Average of Calendar Year Occurred Since 1991. (Table 1: Cost Management Solutions Click to expand.)
In last week’s Trader’s Corner, we shared some surprising data. The first of the two tables shows the month in which the lowest monthly price average of a calendar year occurred. The second shows the month the highest monthly price average of the year occurred.

The takeaway from the study was simply that we can’t just blindly assume that one month or one period of the year is the best to buy. We must take into consideration what is happening in the market overall. We must look at where pricing and propane fundamentals stand relative to other years in deciding when to hedge.

This week, we delve a little deeper into this study. With this next step, though, we narrow the scope. First, we focus on just Mont Belvieu. Second, instead of using the entire 32 years of data, we focus on the past 15 years. We find out that in the first 17 years of the data that buying in the summer for the coming winter generally worked out. There was only one year during that stretch when winter prices were enough lower than the summer to have really hurt the buyer. Even that drop was 16.77 cents, which is relatively small compared to some of the price swings seen over the past 15 years.
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When domestic demand drove the propane market and the U.S. was a net importer of propane, it was much easier to predict price movement. Those of you who have taken over a family business and have heard dad or granddad brag about how brilliant they were in buying supply should take heart that it is a much more difficult market to predict now than it was 16 or more years ago.

For this study, we assume the buyer hedges during a four-month stretch from March through June. Why? Those are the four months with the lowest monthly price average during the 15-year period. And they are four months that would be considered the typical buying or hedging period for most retailers. The average monthly price during that four-month stretch has, during the last 15 years, been 90.2021 cents. That should be the first takeaway from the study. Propane priced below that price point should be considered, on average, a more preferred price point.

However, buying that price does not guarantee winter prices won’t be lower. In fact, the average price for November through December during that same 15-year period has been 86.4863 cents. The average price for the entire winter, October through March, has been 90.8983 cents. Over the entire 15-year period, buying in the best summer months and selling over the winter has been a breakeven proposition. Again, this proves that blindly buying, even in the four summer months that have historically averaged the lowest summer prices, does not always work. In that 15-year period, buying in those four months would have provided lower prices than the winter prices only seven of those years.
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CMS Table 2
Times When Highest Monthly Price Average of Calendar Year Occurred Since 1991. (Table 2: Cost Management Solutions Click to expand.)
Let’s stay focused on pricing for this phase of the evaluation. During the seven years that were favorable to the buyers, the average price of propane in the four-month buying window was 73 cents. During the eight years when hedging during those months turned out unfavorable, the average price was 106 cents. During the seven years of favorable buys, the average gain was 26.08 cents. The problem is that during the eight years when the buys were unfavorable, the winter averaged 28.6 cents below the four-month summer buying window.

Look, we know that the above is obvious. If we buy when prices are lower, the odds of a positive outcome are greatly increased. However, the study does provide a potential target range. Starting at 91 cents, the odds of breaking even are good. Buying closer to 73 cents greatly improves the odds of a favorable outcome, and any buy below 73 cents has exceptional odds of working.

Still, we have to be able to do better. Obviously, the upside in those seven good years was fantastic at 26 cents. Can we avoid the bad years, though? We decided to narrow our search a little more. Of the eight bad years, there were four years that had negative spreads of 8.59, 5.81, 6.45 and 3.20. Those spreads, though not favorable, are probably not going to put us at a major competitive disadvantage. If we accept those years and average them into the positive years, we still achieve a positive 14.41 cent-spread over 11 of 15 years. That kind of hedge spread is certainly worth working toward. We would have to do a lot of other things in our business to improve a margin of 14.41 cents.
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That leaves four of 15 years that we really needed to avoid being buyers during the summer buying window. The average negative spread in those four years was 44.84 cents. The negative range was 15.98 to 84.33. The average price of propane in those four years during the four-month buying window was 126.24 cents.

The years in question were 2008, 2012, 2014 and 2022. The average low inventory position coming out of those four winters was 31.512 million barrels. The average end-of-winter inventory position for the other years was 40.408 million barrels. That is approximately a 9-million-barrel difference. During the four years when inventory was relatively low, the average inventory gain during the summer was 45.8 million barrels compared to the remaining 11 years of a gain of 41.8 million barrels.

We can conclude this: When inventory is relatively low coming out of winter, prices are going to be high. When that is the case, we are the most vulnerable to a negative outcome by hedging during the four-month buying window. The market is going to use high prices to correct the imbalance, and those high prices are likely going to be greatest during the traditional inventory buying window. Secondly, on average during the past 15 years, inventory has increased by 42.835 million barrels from the low inventory position for the year to the high ahead of the next winter. The inventory accumulation period is approximately 28 weeks, meaning the average weekly gain in inventory is 1.530 million barrels. If inventory builds are running higher than that rate, the chances of summer buys being punished is increased. If they are running below that rate, the chances of summer buys turning out favorably is increased.

Currently, from a price history standpoint, propane is at the good end of the favorable buy range. Inventories are not exceptionally low. In fact, they are high coming out of this winter, so the odds of an unfavorable outcome buying during the four-month hedge window is improved. The wild card remains at what pace inventory builds this summer. Many are predicting big gains leading to a low-price environment next winter. That certainly could be the case, but it does go against history a bit. What we must do is watch the inventory build rate and see if it runs above or below average. Propane is priced to move to the consumers if the demand is there. It is possible the inventory accumulation will not be as strong as many are projecting. The key is to closely monitor.
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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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