Propane Barely Draws; Bulls on the Run

The market expected an inventory correction this week, following last week’s 500,000 propane inventory draw number. The market didn’t get it…instead, it went the other way, as the EIA reported a 100,000/bbl draw for the week ending March 17th.

When you combined this rather bearish news with another solid build in crude oil stocks as well as crude oil storage levels in Cushing, OK you have the market bulls on the run and the bears moving in and looking to take up residence.

Exports were at 808,000/bpd this past week, which is the second lowest export level since December 2nd, 2016.  Propane demand was shown as being up 220,000/bpd from the previous week, which was the area I was most skeptical of from last week’s report.  That number came back up, but with exports being down more than 294,000/bpd, that accounts for the difference between this week’s 100,000/bbl draw and last weeks 500,000/bbl draw.

As it relates to propane prices, one has to expect the spot market will see a pull back.  The outmonths will likely pull back as well in the coming days, but I do not expect their relationship to be linear; outmonth values are not dropping as quickly as the spot market.  The Midwest markets are experiencing strong backwardation at the present time, with the front to back spread (the spot market vs what values are fetching out into the future, which is also what we sell fixed priced contracts off of) pushing $.08 to $.10 cents per gallon.  The Mt Belvieu markets are also experiencing backwardation, though the front to back spread is not as large.

On the crude side, the bears are out in full force:

The Saudi’s have to be concerned, as they have born the brunt of OPEC’s production cuts, thus losing market share on the international market, with the hopes of propping up crude oil values in advance of their Aramco IPO launch (sometime in 2018). However, the globe is still awash in crude oil, and values that pushed back above $50/bbl allowed American shale producers to hedge their production north of $50/bbl for the next few years, which means American production will remain robust for the foreseeable future.

I believe the Saudi’s have a couple of choices…stay committed to their current strategy, which is tied to their launching the Aramco IPO (which they hope can generate $2 trillion for their kingdom and create an economy less dependent on the whims of crude oil prices) or they can just go back to the ‘every nation for themselves’ pumping strategy they adopted in 2014, which helped lead us to where we are right now, and kick their IPO offering down the road several years.

If they choose the first option, crude probably has a floor somewhere in the $40’s…probably. If they choose the second option, then crude likely has no floor. It’s hard to see them choosing that second option, but it has to burn them up seeing American producers horn in on their market share, even though the United State is still importing a lot of crude oil.

Interesting times.

But if you are scoring at home, I expected we would see a stronger draw on today’s propane inventory report…we didn’t get that. I hate being wrong, but I do like to see the math add up. While we did see an uptick in demand, as I expected, I didn’t see the near 300,000/bpd dip in exports coming at the same time.

Jon Miller

Follow me on twitter @PropaneBuzz

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