Counter-Seasonal Draw Stokes Propane Concerns

The weekly EIA inventory report showed a 1.2M/bbl DRAW in propane inventories, pushing national levels down to 40.4M/bbls, the week ending 4/7/17.

While market insiders expected to see a draw this week, actually seeing a draw for the first week of April is still a bit shocking to the system.

One year ago, we had a 2.8M/bbl build. Two years ago, the build was 2.0M/bbls. Here is another way to look at today’s 1.2M/bbl draw; when you juxtapose that number against last year’s 2.8M/bbl build, we are talking about a 4M/bbl difference in the year over year weekly number.

That’s an enormous number for this time of year, when we are well beyond peak winter demand.

Once again, the culprit was exports, which checked in at 900,000/bpd, or a little below the expectation. However, that is still an historically strong number. Exports were at 643,000/bpd one year ago this week. Our four-week export average is 886,000/bpd where it was 638,000/bpd one year ago this week.

Such numbers are at the heart of the growing inventory concern in the propane marketplace.

I know of some significant industry traders are expressing real concerns about inventory levels not getting to levels they need to be at in advance of next winter. A report like what we had today will only stoke those concerns and churn the markets higher.

Prices are now higher, as far as winter contract goes, than they have been since late February. My gut tells me we will continue to see prices creep higher, slowly, over the next week until the next inventory report is released and either confirms the fears or offers a respite.

National inventories sit at 40.4M/bbls. If we get a draw of 500,000/bbl or greater next week, we will move below 40M/bbls. But really, any draw during the second week of April is enough cause for concern, just as today’s draw is a cause for concern given how the draws are happening; exports.

The EIA’s ‘Days of Supply’ index now sits at 34.90 days. However, the EIA does NOT factor in export levels into their ‘Days of Supply’ value. If we do that, we are at 19.63 days. If this were early February, propane prices would be over $1.00/gallon.

The next week will be an important one on the export front. May cargoes will be locked in over the next six days. Those orders will either be finalized or cancelled, or a combination of the two.

As of yesterday, it is believed that ZERO export cargoes had been cancelled for May. If that should hold over the next six days (zero cancellations), then that first four to six weeks of the propane build seasons I wrote about a few weeks back, pursuant to being a key indicator of where things could go this year, will fall squarely into the bullish camp.

It will mean that for the next several weeks, propane inventories will be hard pressed to build at traditional, seasonal levels.

Here is what the industry has seen for builds in April in recent years:

2016: 9.1M/bbls
2015: 7.3M/bbls
2014: 4.9M/bbls

The 2014 build was at the dawn of the shale production era, where the last two years have seen the full brunt of the increased production. This April we are starting in a 1.2M/bbl ‘hole’ of sorts as it relates to the final April build level for 2017. To match last year’s 9.1M/bbl build for April, we would need to build 10.3M/bbls over the next three weeks, or an average of 3.4M/bbls.

That simply will NOT happen if cargoes don’t get cancelled, and it may be tough to reach even if some do get cancelled.

Also consider the combined April-May builds of the last two years:

2016: 12.6M/bbls
2015: 19.6M/bbls

Then consider we have yet to reach the ‘bottom’ of inventory this year, considering we are still in a cycle of inventory draws. At best, we will begin this year’s inventory build season next week, and we begin it from a starting point of 40.4M/bbls. One year ago at this time, national inventory levels were sitting at 67.7M/bbls, a mind-boggling 27.3M/bbls higher than where inventories are now. Another way to say it is we have 40.4% less propane on hand right now than we did during the same time one year ago.

How big of a number is 27.3M/bbls?

*Consider that inventories drew down a total of 21M/bbls nationally between January and February this past winter.

*Consider that inventories drew down a total of 19.3M/bbls between December of 2013 through March of 2014, which was one of the coldest winters in recent memory.

*Consider that inventories drew down 21.5M/bbls this past December of 2016, which was the single-largest one-month drawdown in recorded history…

Even if we used the December 2016 number, the largest one-month draw in history, as a one month demand projection for this coming winter, we are beginning this build season with at least five-weeks less supply on hand than we had one year ago. In reality, it’s likely more than that because you never use the most extreme variable in statistics for the purposes of projections. So in this instance, we are giving the most extreme benefit of the doubt example and the prognosis is still concerning.

The bottom line? There is chum in the water right now…look out for the sharks because they are coming in to take a bite…contract prices for Mt Belvieu based markets are up nearly $.0200/cpg on the day. Conway and Mt Belvieu are both up over $.0700/cpg in the spot markets for the past week.

If this inventory situation does not turn around, and turn around in a hurry, it’s not like we didn’t see the runaway train heading down the tracks. The only question that matters is this; what have you done to avoid the wreck?

Jon Miller

Follow me on twitter @PropaneBuzz

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