Little more than a year ago, I was writing about ‘the amazing propane drawdown of 2015-2016’. I thought it amazing due to how much propane was ‘consumed’ in the United States in one of the warmest winters on record.
Last winter, from the inventory peak month of November 2015 where inventory levels were at 104.1, through March of 2016, the industry drew down over 41M/bbls, which made it one of the larger seasonal drawdowns, ever. More impressive was the fact that we were looking at a three and a half month time frame for that drawdown.
This winter’s drawdown makes last winter’s drawdown look like a Boy Scout wiener roast, and this winter was just barely less-mild than last year:
Between the peak inventory position of 104.0M/bbls in September of 2016 through March of 2017, our national inventories drew down 62.4M/bbls. That is the largest seasonal drawdown of propane stocks in history and by a long shot. The cold and nightmare winter that was 2013-2014 saw propane stocks draw down 42M/bbls, by comparison, but we didn’t have strong export demand at that time.
Here is a sampling of heating seasons where we had less than 62.4M/bbls of propane nationwide, heading into winter:
We just drew down 62.4M/bbls in six months, and in five of the past 20 years, we didn’t even have 62.4M/bbls of propane supply in the United States. Heck, entering the winter of 2013-2014, where propane prices set painful records to the high-side, we had 67.0M/bbls heading into the winter season.
We live in a far different propane world in 2017 than we did in 2013, even though that was just four winters ago. Export capacities right now are incredible, as is propane production.
That said, we now sit at 41.6M/bbls of inventory nationally. As I have been writing, that is a big concern. But you’re probably tired of reading my thoughts on that, so let me bring in another voice with similar concerns; Citi Bank analysts. The following excerpts were originally produced by OPIS on 4/6/17:
“Analysts at Citi (this week)…came away with the suggestion that U.S. stocks of propane could be drastically short of needs when next winter looms…Citi suggests that what happened in propane this winter may serve as a template for future years, citing an ongoing structural change in U.S. markets.
Preliminary Energy Information Administration (EIA) data suggests that U.S.propane stocks drew down by 58M/bbl (as I wrote above, it’s over 62M) this past winter, some 20 million bbl more than the previous winter and 25 million bbl more than the five-year average. The draws occurred despite warm weather in key propane consumption states, emphasizing that exports, and not local weather, hold the key to United States LPG.”
JON NOTE: None of this should sound surprising to any of you, as I have been writing about these factors and convergences for well over a year.
“Citi expects sharp winter (price) rises in U.S. propane to be an ongoing phenomenon rather than a one-time event. Excess export capacity stateside should keep the U.S. more in tune with global pricing and that global seasonality will be transmitted to U.S. markets, leading to stronger winter numbers going forward.
Ironically, as this winter ends, the bank sees real problems getting to necessary storage levels ahead of the next propane heating season. “Exaggerated price” and greater seasonality is forecast as well as stronger inventory drawdowns in winter. The bank estimates that a comfortable level for U.S. propane storage at the end of October is in the 90-million-to-100-million-bbl range. That level is necessary for March 2018 to end somewhere near the 35-year average inventory level of 35 million bbl.”
JON NOTE: Again, nothing new here, you’ve seen me comment on the same things…stay with me though, things take a more dramatic turn here shortly.
“Citi calculates that there will be about 1.6 million b/d of propane export capability stateside once the Mariner East 2 project gets commissioned to take Appalachian gas liquids to Marcus Hook. That will put export capability beyond the exportable surplus of propane, but rising shale output could fatten stocks later in the decade.
In short, the bank suggests that the sell-off in propane last month is most likely overdone and anticipates that exports may need to decline in order for U.S. coffers to reach sufficient storage by October’s end. Unlike last year, when end-March propane inventories were quite high, there is “no head start” this year. Inventories built by 40 million bbl last summer.
Citi suspects that end-October propane storage may only get to 60 million bbl. Stronger production or weaker demand might narrow the need, but there is a clear suggestion that higher prices brew ahead of next winter.”
JON NOTES: Whoa. Do I think we will only build back to 60M/bbls by the end of October? No. I believe we will be higher than that. But if you came to me and said ‘Hey Jon, the over/under on end of October inventory is 90M/bbls, which side are you taking?’ I am taking the under. You’d seen me write that anything below 95M/bbls is cause for some nervousness in the trading community and that could put upward pressure on propane prices. The comments from Citi echo my sentiments there.
But if we enter a winter with less than 85M/bbls, that is a big concern. If we enter a winter below 80M/bbls, that will cause prices to move sharply higher.
If we entered a winter with just 60M/bbls, as Citi ‘suspects’, that’s an all-out crisis and propane prices would shoot through the roof.
We have a long way to go before the fall and next winter. We’ve all seen how resilient this industry can be at balancing inventory levels. However, we have never before had this much export capacity, this much ability for propane inventories to evaporate as quickly as what we just witnessed this past very, very mild winter.
You can’t say you weren’t warned…and you won’t be able to say that you didn’t have the opportunity to lock in your prices where they are now.