Yearly price highs met with sharp sell-off; what happened?

February 13, 2017 By and    

On Feb. 2, U.S. propane prices hit highs for the year. On that date, Mont Belvieu closed at 93 cents and Conway closed at 89.5 cents. Three trading days later – on Feb. 7 – Mont Belvieu closed at 77 cents and Conway closed at 67.5 cents. The 16-cent loss in Mont Belvieu and the 22-cent loss in Conway represented 17 percent and 25 percent decreases in value, respectively.

While it is difficult to pinpoint the cause of the two-day runup in prices that eventually turned into a sharp sell-off, it could have been associated with the loading of export cargoes. In theory, spot buying to load some cargoes could have put a squeeze on available February barrels running up prices, but once that buying ended, the market was suddenly left with a void in demand. Propane opened down 3 cents on Feb. 3, one day after setting the highs. That would indicate a sudden drop-off in buying interest becoming the catalysts for more selling that eventually turned into a rout.

The backdrop, though, was milder weather conditions and reports of declining export volumes. Propane markets were ripe for a correction, and they needed that first fruit to fall from the tree to start the downward correction.

Propane was on a very strong run that had accelerated just two days before the downward correction ensued. Very strong days at the end of a long run will often trigger events to end the rally. The strong days at the end of the rally are often referred to as exhaustion days. It is simply a point where traders believe prices have gotten too high and there is an increased likelihood prices will fall. The strong days at the end of a long rally will often trigger those feelings in traders and result in the exhaustion of the uptrend.

Propane’s strong run had been driven by a series of above-average draws on propane inventory. In fact, the strong draws on inventory did not end after this correction. On Feb. 7, the Energy Information Administration (EIA) released its latest data showing propane inventory had declined 6.876 million barrels, taking it to 55.772 million barrels, just above the five-year average. Industry experts had expected a 3.5-million-barrel decline in inventory, and the five-year average decline for the week reported has been 2.678 million barrels.

The draw put inventory over 19 million barrels below the same point last year. The data showed imports dropped slightly from the previous week, but remained above 1.1 million barrels per day (bpd). What may have been even more surprising, given the milder weather conditions, was a 308,000-bpd increase in domestic propane demand.

The draw halted the sharp decline in propane prices, but the rebound attempt was very weak. It was evident traders did not want to give up on the bearish bias that developed since the downturn began. On Feb. 9, one day after EIA had released its latest data, the rebound attempt looked in trouble. Conway had already given up its Feb. 8 gains and Mont Belvieu closed barely in positive numbers. Feb. 10 didn’t show much more enthusiasm for the rebound, even with a strong run in crude prices for support.

There are likely three to six more weeks of inventory draws remaining for this winter. They should start getting lighter each week if history repeats itself. However, the industry has never had the export capacity or the export volume it is experiencing this year. There is an overt resistance to take February propane prices back up again. And if the large draws on propane inventory do not abate soon, it could still happen.

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