INVENTORIES: The EIA released its weekly report for the week ending 5/11/18, and it showed a build in propane inventories of 1.7M/bbls.
National stocks now sit at 40.4M/bbls vs 42.2M/bbls one year ago. Propane production was 5K/bpd higher this week than last, now sitting at 1.88M/bpd vs 1.803M/bpd one year ago. Exports were at 766,000/bpd vs 707,000/bpd last week and 1.254M/bpd one year ago.
We’ve added 4.7M/bbls to inventories over the past three reporting periods compared to 2.6M/bbls for the same reports one year ago and 3.0M/bbls two years ago for the same time frame
GLOBAL MARKETS PUSHING PROPANE: Propane values were up another two cents early on Wednesday morning, prior to the release of this week’s inventory report. Yesterday’s closing averages were $.9241 in Mt Belvieu (MTB) and $.7481 at Conway. As of 9:30AM Eastern, MTB had traded at $.9550 and Conway at $.7700. Insanity.
The reason is that the Far East Index continues to push higher, which is dragging MTB values higher. The export trading arb remains wide open for MTB, as United States sourced propane is still a value to the Asian markets over Middle East alternatives. One factor in play is the Brent to WTI crude spread, as it is approaching nearly $8.00. China and Japan see their present propane stocks at or below year over year levels, so they still have some buying to do to add to their reserves.
This ‘could’ wind up feeding into a similar scenario to last year, where we see prices run up during the spring and summer in order to keep as much propane stateside as possible, and then we get into the winter months, the Asian appetites wane and the domestic markets fall off at the trading hubs.
Take a look at the image below. On November 28th, MTB propane closed at an average just under $1.0200. On February 6th, the closing MTB average was just under $.7700. We had just come through a colder than normal January, and a month that stressed supply logistics in the Chicago, Indiana, Ohio and Northeastern markets. Rack prices were still very, very high, and weather forecasts were still calling for a colder than normal February. Still, on January 11th, literally days after the coldest, most energy demanding eight-day period in recorded history, the MTB average was just under $.9000, or more than a dime off its late November peak.
This was a time that saw traders scratching their collective heads…and this is a reminder (for all of us, me included) that propane is a global commodity, and it’s no longer easy enough to look at domestic inventory, supply and demand factors to hang our hats on projecting forward price curves….what happens overseas is just as important, if not more so at times.
The times we have been living through since April 4th, 2018 are a testament to that notion; crude oil factors are pushing propane prices and the trading arb remains open at these high levels, which is pushing things even higher.
Remember back a few paragraphs when I said that Japan and China are at or below year over year propane supply stocks, and that the Far East Index is pushing up and dragging propane with it?? .Consider this recent EIA report that broke down domestic propane exports and their destinations. This, from the linked article:
In 2017, the United States exported 905,000 barrels per day (b/d) of propane, with the largest volumes going to supply petrochemical feedstock demand in Asian countries. Four of the top five countries receiving U.S. propane exports are in Asia—Japan, China, South Korea, and Singapore. They collectively imported 452,000 b/d of U.S. propane in 2017, or approximately half of total U.S. propane exports. Overall, propane accounted for 17% of all U.S. petroleum product exports in 2017.
U.S. propane exports to these four countries doubled between 2015 and 2017, displacing some of the region’s propane supplies from the Middle East as well as regional production of propane from refineries and natural gas processing plants.
Some of you have contacted me, saying that you are nearing the time of year where you take a fixed winter price to some of your customers based on your winter programs. You’re asking me what you should consider doing. With the values we are presently seeing in propane out the curve, I would not buy any more gas for the winter than you either have sold, or what you can reliably predict you will have sold based on the ordering history within your particular company. Barring a serious geopolitical event or series of events (war in the Middle East), I fear a similar early to mid-winter price drop off and you don’t want to be long on contracts that are not back to backed with sales or deliveries to your customers.
For those if you in areas of the country where securing supply is just as if not more important than locking in pricing, be sure to ‘get your seat on the bus’ via volume commitments through index contracts. But ‘If I Were In Your Shoes’ (IIWIYS), which is ALWAYS how I analyze things, I wouldn’t lock in any length I didn’t have to at this time.
I realize that makes some folks nervous, having possibly more ‘open priced’ volumes at this time than they might normally have. You need to do what is comfortable for you and for your business and one size does not always fit all. Cover what you feel like you have to cover, but no more…and keep taking small bites (cost averaging) along the way.