How arbitrage impacts propane retailers

Propane had a sneaky bullish week that ended on Aug. 25. Propane overall moved higher than crude, and Mont Belvieu prices notably outpaced Conway. As we talked to traders, it appeared export demand, or at least anticipated export demand, was behind the strength, which makes sense given the superior performance at Mont Belvieu. Mont Belvieu is influenced more by exports than the Conway market.

Chart 1 – Total US Propane Exports 2018 Forward

When talking to traders, they said the arbitrage window is wide open. Traders just love the term arbitrage. Arbitrage means: The simultaneous buying of securities, currency or commodities in different markets or in a derivative form to take advantage of differing prices for the same asset.


If I own a boat in the desert, its value is probably low if I try to sell it where I live. Prices are likely better around the Great Lakes. If I advertise my boat for sale around the Great Lakes, get a reasonable offer, and the cost of transporting it there is less than the lower price I am offered at home, it will benefit me financially to take advantage of the arbitrage.

Propane retailers deal with arbitrage every day because the price of propane in their market is going to be more than the price of propane at Mont Belvieu or Conway. Similarly, the price of propane in the U.S. is less than the price of propane in Europe and Asia. So, when traders say the arbitrage window is wide open, it means that a seller can easily cover load, transport and unload costs to move propane from the U.S. to overseas markets and make a better profit than selling it here.

Chart 2 – Far East/MB ETR Price Spread

Despite good export economics and strong export activity at the beginning of the year, exports have been trailing off recently.


Exports are volatile week to week, so focusing on the smoother trendlines makes it easier to evaluate. In Chart 1, the red line is this year, and it is easy to see how much higher exports were at the beginning of the year over last year (blue line) and the five-year average (green line). But more recently, the trend is lower and close to intersecting with last year’s level. U.S. domestic demand has been increasing to offset some of this decline. But, with U.S. propane production recently jumping, downward pressure on prices is likely if the export trend stays in its current trajectory.

Chart 3 – Europe/MB ETR Price Spread

Chart 2 shows the price difference, or arbitrage, between the Mont Belvieu and Far East markets. Export economics have been favorable for a while. Softness in exports would more likely be due to overall weak economic conditions. But you can see how the spread has been increasing, especially this month. It is certainly easy to imagine such an arbitrage would encourage more U.S. exports if there were any demand out there. Plenty of headlines highlight the discouraging performance of the Chinese economy. Keep reading...

Cost Management Solutions LLC (CMS) is a firm dedicated to the unbiased analysis of the energy markets for the propane industry.

Mark Rachal, Director of Research and Publications at CMS, regularly provides insightful looks into various facets of the marketplace.