Energy markets sure pulled a bit of a head fake on Monday and Tuesday, with propane & crude oil prices roaring back from the lows of the year we saw last Thursday.
We’ve seen prices for fourth quarter propane rise nearly a DIME since last week and it’s been due to one big driver, and that is the weak dollar.
A weaker dollar makes dollar-priced oil less expensive for buyers using weaker currencies, boosting demand and pushing global prices higher. It’s a bit of a hedge of sorts. When the dollar is stronger, oil typically suffers.
So the big run up in crude prices from last week, and therefore propane, have been due to some seesawing of the dollar and had less to due with fundamentals of supply and demand in either crude or propane.
Then late Tuesday came word from the API report that crude saw draws last week in excess of six-million barrels and that sent crude prices even higher late in the day, which also sent propane prices higher.
There was a brief window of time last Thursday (June 4th) where I was able to sell fourth quarter Conway at 4550 and Belvieu was also a hair under 5000 as well. As of Tuesday’s close, our Conway fourth quarter number was 5475 and we were 5875 at Belvieu.
I won’t sit here and say that I saw this coming, as I felt we’d continue to pull back on the weakness in both markets.
Crude weakness being OPEC chose to not cut production at their biannual meeting amidst more than ample global supplies and propane’s robust inventory situation in the United States, where we seem headed for all time inventory records unless something drastic happens.
Frankly, neither of the major fundamentals have changed for either product; this is just one of those things where factors outside of fundamental supply and demand have taken over but I believe it will be for the short-term and prices will pull back.
There is one item I read on June 9th that is linked here. Depending on when you read this, the link could have converted to a ‘pay to read’ but for right now, it’s still free and worth your time.
The first quarter of it will likely be review but there are some key elements to it worth shining some light on here. Some highlights:
NGL storage capacity at the nation’s largest facility at Mont Belvieu, TX is getting close to maxed out due to problems with brine levels…Adding insult to injury has been recent heavy rains in the Belvieu area diluting the brine ponds and further reducing capacity. The bottom line is that the propane industry is facing an epic storage crisis this summer unless some new source of demand shows up to save the day.
We are nearing the point where I have been wondering when the new propane export capacity would be coming online. Several projects are in the works, as I outlined several weeks ago in this blog post. The article sheds light on that increased capacity, so all we discussed several weeks ago is in play in theory.
But the heavy rains in the Gulf that have been disrupting the brine storage have had an impact on what can be exported, plus lack of available tanker ships but there are new fleet additions which should be available later this year. The article then turns its attention to economics of feedstocks and how naphtha has been the more favored feedstock overseas when you factor in the cost for shipping and the decline in crude oil costs.
This led to a Monday price for prompt Belvieu propane of $.3100, the lowest levels seen in 13 years. That dropped the Belvieu propane to crude price ratio down below 23%, where it was 47% a year ago and historically has been nearer to 60%.
These are amazing times, indeed.
Another sample from the linked article:
About the only other ray of sunshine on the horizon for the U.S. propane market at the moment (aside from an export revival) is the prospect of increased demand from domestic petrochemicals. In fact the margins for U.S. petrochemical crackers using propane as a feedstock have been higher than for its cheaper rival ethane lately.
The article talks about how propane may be coming back into favor as a petchem feedstock, as long as ethane prices don’t crater due to falling propane prices. It also discusses a Dow Chemical project that will come online in late summer that will chew up some propane.
Here is the last line from the item that I will sample:
At the end of the day if these adjustments to supply and demand fail to stem the surplus this summer then prices at Mont Belvieu may need to drop to the level of natural gas – such that surplus propane ends up being used as a substitute fuel in place of natural gas at industrial plants and refineries. At yesterday’s settlement price for CME/NYMEX natural gas Henry Hub, LA futures – $2.705/MMBtu – the equivalent propane price would be 24.59 cnts/Gal – likely with a host of other transport and storage issues to overcome that would lower the price further. Propane producers at the Gulf Coast will be hoping not to have to travel down that road.
Again, I think the article is worth your time. It goes into greater detail on several points I have been discussing with you for the past several months. I don’t think exports are going to ‘save the day’ as it relates to supporting propane prices this summer, at least in a big way. Crude oil is still driving propane right now, but I think that continues to mask the underlining bearishness in propane as well as crude oil’s less than bullish supply and demand picture. Financial and technical factors caused this latest crude oil run up and propane was dragged along with it. I don’t see any real fundamental support for propane to remain at these levels.
My advice to you right now is that if you have to cover some sales you have made and your margins are acceptable at current prices, then you should consider covering them. If you don’t have any sales to cover at this time, then right now might be a time to sit on the sidelines and wait for prices to come back down, as I believe they will. That is barring any unforeseen geopolitical unrest, of course.
The bottom line: the current supply and demand economics of propane do not support pricing at current levels. I suspect another significant build in propane inventories when the EIA report is released later today and I believe you’ll be able to lock in prices for winter propane at the lower levels we saw last week here over the next few weeks as propane prices come back down…that is, whenever crude oil comes back down.