Crude Oil Trumping Propane Fundamentals

Even though national propane inventories are below 36M/bbls and over 4M/bbls lower right now than where they were one year ago, the ‘mood’ in the trading community has not been fearful.

We just made it through one year where we entered spring near these levels, we built back to just over 82M/bbls in Mid-September and we made it through the winter without any real concerns of running out of product. In fact, the trading hubs at Mt Belvieu and Conway actually weakened as we got into the heart of winter, with the real price volatility taking place off-hub…I think that behavior could be shades of things to come, but that is a topic for another day, and an important one at that for those of you who use price protection tools based on Conway or Mt Belvieu averages.

As I wrote a month ago, once you experience something and survive it, your fear or trepidation is much lower to non-existent the next time you face a similar set of circumstances, ergo where we stand now with national propane inventories, the backwardation out the trading curve which is a bearish signal, etc.

That said, propane values have risen four to five cents out the curve in April, while spot values are up roughly eight cents at Mt Belvieu and nearly six cents at Conway.

Yes, a good swath of the country has experienced colder than normal temps for much of March and April, but inventory concerns are no longer on the table, so what has been pushing propane?

Crude oil, and the reasons behind crude oil’s rise are geopolitical in nature.

For a fundamentals guy like me, geopolitical risks cause me to grit my teeth, largely because they are tough, if not impossible, to predict.

I wouldn’t have predicted this price rise, one month ago. That said, one month ago, we were not on the doorstep of a trade war with China, we weren’t on the verge of getting involved in a proxy military dust up against Russia (via Syria) and we didn’t have the Saudi’s openly talking about a desire for $80/bbl crude.

The Saudi’s support of crude values is not a surprise, as I wrote about (on March 7th, titled ‘The Rise of Propane Propane Production’) their likely desire to keep crude values higher due to their impending Aramco IPO launch

The Saudi’s are banking on the drop in Venezuelan production and impending US sanctions on Iran to soak up the increasing American production from Shale plays who have been financially encouraged to boost production efforts with crude values north of $60/bbl. Bloomberg wrote an article on Tuesday suggesting that the Saudi’s are ‘secretly’ targeting $80/bbl crude.

Given that, along with the geopolitical tensions in the air right now (and a potential trade war with China could have a far greater impact on crude prices than a proxy standoff with Russia in Syria), crude is strong as Ajax. WTI crude is trading over $66/bbl right now with Brent crude over $71…so $80/bbl of Brent isn’t all that far off.

At the present, Mt Belvieu propane is trading just north of 51% the value of WTI crude, with Conway lagging behind at 41%. As of yesterday (4/11) the Mt Belvieu to Conway spread, relative the the daily average close, was a stagger $.1600/cpg.

Conway at 41% of crude is on the low range of the historical spectrum, while Belvieu’s 51% is within historic guideposts.

$73/WTI, at a 51% Propane to Crude relationship, would equate to $.8864/gallon propane at Belvieu at current relationship values, and $.7126/gallon at Conway.

Those aren’t predictions, rather, hypothetical examples of what a geopolitically charged crude oil outlook can do.

It definitely feels like there is a near $5/bbl geopolitical fear premium priced into crude oil right now, as the fundamentals didn’t push crude up from intraday trading below $60/bbl back on March 8th.

If the geopolitical issues get solved in the next few weeks to few months, alongside the increased US based propane production I am anticipating and wrote about in March, we will likely see the pullback on propane prices that I have been anticipating and the one the propane fundamentals suggest should be there in the coming months.

If geopolitical tensions do not ease, and that factor is nigh on impossible to predict, then uncertainty and thus volatility will reign supreme.

Jon Miller

Follow me on twitter @PropaneBuzz

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