My ‘regular’ market commentaries have been sparse in recent weeks given the severity of the propane market crisis, so please forgive me for that interruption in those communications. While winter is not over, I had some time to sit down and put my first predictions for the year on ‘paper’
Here we go.
INVENTORIES: As of this week’s report, current national inventory levels were at 26.7MM…which is 21.2MM BELOW last year’s inventory level at the same time and 8.1MM below the five year average. Gulf inventories were an astonishing 16.7MM below last year and 4.8MM below the five year average.
EXPORTS: They are here, they are not going away and millions of barrels per month are already contracted through 2020. Can the arb crash and clauses kick in that will cancel some cargoes from going overseas ? Yes and we saw that in December 2013. However that means one important thing; domestic prices have escalated to crash the arb spread.
PSYCHE: I talk with Dixie retailers every day. The most common feedback I am hearing right now is everyone believes they are going to prebuy more gas this year than they have in a long time, because their customers will want to do the same. I agree with this. I think it’s going to happen all across the nation. The more people that do one thing drives up the price of that one thing.
CONTRACTING: Some people buy on Mt Belvieu based indexes, or have in the past. By and large, I would wager the price of those is going to go up this year as companies who offered those last year were delivering on them at Belvieu plus 7 to 12 and the differential between Belvieu and Hattiesburg was higher than that from November through mid February. Sometimes it was over a dollar higher. Even on the trading side, we’ve received ‘offers’ from some producers this week that would have us sharing in the risk of a Belvieu to Hattiesburg blowout. We’re not interested in that and can just pump the barrels over and pay that fee. So we are already beginning to see elevated economics in the cost structure.
These factors alone give me all the support I need to recommend that you contract prebuy gallons sooner than later last year. Some people arbitrarily decide to buy in certain months of the year even though historic data would tell you that is not going to yield the best price. That said, there is another WILD CARD that is beginning to show its head….
EL NINO: I have been tracking weather blogs and speaking to meteorologist friends of mine for a few months now related to the likelihood of an El Nino situation developing this year. I have felt confident that this would happen and now more and more mainstream websites are beginning to write about it and discuss it.
What does an El Nino typically mean to the Southeast? Wetter than normal conditions and cooler than normal temperatures. The El Nino pattern creates a more zonal (west to east) jet stream pattern, as opposed to what we saw this winter with extreme Pacific ridging that creates favorable conditions for cold and deep artic blasts…hence, the polar vortices which were prevalent this winter.
This is good news as it relates to hindering the forming of significant tropical storms or hurricanes. It will also create a strong likelihood for more heating degree days and even demand for heating season…but increased demand, if history is any indicator. Let’s look at some history:
Pretty much the entire Dixie Pipeline customer area sees cooler temperatures during El Nino years.
Also, here is a look at some recent El Nino years:
In 2002, we saw inventories draw down in the Gulf region from 30MM in November of 2002 to 10.8MM in Feb 2003. In 1997 we had inventories of 23.6 MM and they dropped to 10.9 in February.
In the Midwest in 2009 we had arguably the largest corn drying season in history, something that would make this year’s challenges look like a trip to Disneyland.
-More people want to prebuy gas for next winter
-Inventories are not likely to build to comfortable levels which will cause pricing challenges at some point in time
-Weather phenomena are setting up for good demand next heating season
-Those same weather phenomena may significantly hammer other areas of the nation who can draw upon Gulf inventories
-Exporting is a part of our supply scenario, like it or not
I think you should begin your cost averaging process for next year if you have not done so already. I spent a better part of this morning talking with our traders and expressing my desire for NGL to get out in front of this. We do fixed pricing and prebuy very well and those of you who took my advice last summer enjoyed some very, very profitable contract prices this winter.
Our program of June 2014 through March 2015 allows you nine months of flexibility…pull the gas whenever you want in those nine months. If rack prices are cheaper than your contract when you need some gas, pull off the rack and lift the contract gallons at a later date. I feel strongly about this and I’ve persuaded our traders to lower our price even a bit lower than it was this morning and our price this morning was a few cents lower than the closest competing contract I am aware of.
As always, call me or email me with any questions.