I have trained myself to look for bulls and bears every day, to compile as many different opinions as I can, to absorb as much information I can and to form my analysis based upon the information, data and industry trends.
That said, it’s real, real hard to find any bulls right now as it’s a forest full of bears.
OPEC met on Friday, one of their two large and important annual meetings, and they have elected to not cut their production. While this was expected, it certainly helped to send crude oil prices lower on Friday. It’s the near-term outlook that looks bleak for those wanting some time of price support in oil and therefore propane.
“The reality is we cannot have prices at $100 [a barrel] any more,” Opec Secretary General Abdallah El-Badri said after the meeting. “We had to take action.”
That action was last December when OPEC chose to ramp up production to protect their market share in a brave new crude world where multiple non-OPEC countries have become major production players, such as the United States and Russia.
That action led to a drop in oil prices from $110/bbl down below $45/bbl in early winter, something that helped to drag propane prices with it.
17 months ago, we saw propane at all time record highs. Then we saw propane production ramp up to record highs since then and yesterday, we saw the lowest prices at the major propane hubs (Conway and Mt Belvieu) since 2002; Mt Belvieu traded at $.3150 and Conway $.2975.
So what next?
American energy companies are still making money with crude oil at these levels and we’ll continue to see production, even though we’ve seen shale rig counts drop dramatically since a year ago. OPEC is still going to pump the gas. Iran will come on at some point. Russia won’t be cutting back.
In other words, those who can afford to produce crude oil will produce crude oil…so I remain bearish on crude, despite of some of the items I have linked in recent reports. I think it’s best to share differing opinions, but outside of geopolitical unrest that is usually impossible to predict, it’s very, VERY hard to find any real reasons to be bullish on propane. OPEC’s next regularly scheduled meeting is December 4th, so batten down the hatches until then.
I’d extend these thoughts to propane as well, which continues my theme for this spring. As it relates to locking in prebuy contracts, buy in smaller amounts than you are used to buying which means you’ll have more contracts but you’ll be cost averaging, which helps to mitigate upside and downside exposure.
Many of you are either setting some winter pricing right now or soon will be. I am not suggesting you send out prices and begin taking orders and not cover those amounts; that can be a risky strategy. Cover what you need when you need it. Once you do set a price for your level pay programs, you can still cost average down if the market moves that way, or you can lock in your profits you are comfortable with.
Having a disciplined purchasing plan is the best way to ride out the volatility in this industry. Even if you own some contracts that are higher than the present market, you made it through last winter when the price drop was far more dramatic and significant than what you will face this year.
Unless they just start giving away propane for free…which I am hearing of at a few places in Western Canada. The thing is, those $1.000-plus freight rates won’t help you any.