Propane inventories declined for the third straight week, with a drop of 400,000/bbls according to the EIA Report released today for the week ending 9/29.
We keep a spreadsheet that tracks the month to month inventory data, going back to 1985. The end of August number on our sheet showed inventories at 73.6M/bbls, and we now stand at 78.0M/bbls. On the surface, that looks like a 4.4M/bbl build for September.
However, the data we have includes the enormous 6.3M/bbl build from the EIA report that ended September 1st. Our data had that build in our September number, when in reality, it should have been in the August tally.
My point? We likely just experienced, at best, a month of September where we did not build any inventory and possibly even lost ground. The last time we didn’t build inventories in September was 1999. I’d say that is significant, especially in the face of our new inventory realities where we are at the mercy of export economics. More on that in a bit.
One year ago this week, inventories stood at 104M/bbls, so we are 25% lower than one year ago. Two years ago this week, inventories stood at 98.7M/bbls on their way to 104.1 by the end of November. Three years ago this week, inventories stood at 79.6M/bbls. We are also 7.9M below the five-year average of 85.9M/bbls.
The past 10 or so days have been interesting. Prices rose as expected during the first part of last week, but a sell-off began late Wednesday of last week and continued through yesterday, as propane peaked at $.9693 on the OPIS average on Wednesday, September 27th before shedding over a dime of value to average $.8600 yesterday. There was a good amount of profit taking going on in the trading community, despite no change in the long-term and fundamental outlook on propane. One signal for that profit taking was likely a lack of interest from foreign entities on the exporting front.
I mentioned to a co-worker yesterday afternoon that this drop, and a quick one at that, without any undermining in the bullish outlook for propane could bring foreign buyers back into the propane export market, as trading arbs likely grew more favorable in a very short amount of time with the price drop.
That thought came home to roost less than 24 hours later, as we saw a good deal of buying activity from the ‘export community’ this morning and spot propane prices shot up a nickel per gallon before 10AM eastern. Prices for contracts also moved up accordingly.
I believe we will see a good deal more of this short term volatility during this propane home heating season. Inventories are low, respectively. The export aspect is a very liquid component, and one that, when they are in buying, has the power to move the market a great deal due to the size of the purchases. Whenever they are not in buying, it can create an environment where prices fall.
However, we have a concerning inventory level position in the background at all times, and that’s the reason why I think the general month to month trajectory for propane prices is higher, at least for the next few months. I think we can expect a stair stepping style of movement to the higher side, which may include a few steps back here and there but the general direction should be up and to the right.
Here is a visualization of Mt Belvieu daily averages since August 1st. The red coloring is my addition based off of trading early this morning as we are back north of the $.9000/cpg mark:
As you can see, we have seen some ‘pull backs’ in early August, mid-August and a few other times…but on the whole, the trajectory is higher. Until we get to a point where exporting activity falls off a cliff for an extended period of time, or we get into November and December and we don’t have any weather to speak of, I suspect this picture will continue to look similar to what we have experienced in recent weeks and months.
The only fundamental downside risks I see right now is if we get to January and there is no winter. Until then, the downside risks seem less significant than the upside risks, and would likely be short-term pullbacks.