Weather Thoughts & High Prices

The European and American weather models have been in extreme disagreement as of late…about as much disagreement as one can get. This, from a couple of days ago:

And also disagreement within the same model, run to run. The image on the left was from the midnight run on 1/16, while the image on the right was the noon run on 1/16, both on the European model:

The American model has been seeing the cold much better than the Euro and Canadian. The old 15 day outlooks of the Euro and Canadian had the eastern portion of the United States baking in heat right now, while the American saw the cold…and the cold has verified. This is similar in the outlooks through the end of November, although the European is evolving to colder solutions in recent model runs, or colder than it had before.

Having a nice blanket of snow on the ground helps the cold advance and stay around longer, something we have in play right now that we did not have one year ago.

In looking into December, I was watching a video from Michael Clark of BAMwx.com this morning, and he said “Any warmth in the models seems to be struggling to stay around, and a colder than normal December is still showing up.”

The Sea Surface temperature analogs are supporting of such a pattern for the winter:

The 2017-2018 winter pattern is in the process of setting up, or revealing its clues…

From everything I read, I think we could see some moderation in the temps over the next 10 to 20 days, but there is ample data to support a normal December, at worst, for temperatures.

PRICES: Mt Belvieu propane traded north of a $1.00 this morning. For context, these are the highest values since October 8th of 2014, when crude oil was shedding so much value.

Prices have risen 80% since March 2017 and 75% since June 26th, 2017. The Mt Belvieu OPIS average on November 16th, 2016 was $.5150, and propane has traded 100% higher than that this morning.

That’s quite a year-over-year jump, but when you consider we have nearly 27M/bbls less propane on hand right now than one year ago (and likely adding another 3M-5M/bbls to that y-o-y deficit next week), the strength is not a surprise.

As I have said before, I am big on the fundamentals. My belief in fundamentals makes me comfortable in my recommendations to clients. These beliefs were why I was so bullish this past spring, and why I was insanely bullish in late 2015, when I introduced my ‘Wheel of Propane Supply and Demand’ in this blog post from 12/22/15. In that item, I wrote:

I think propane retailers have an opportunity right now to lock in some of the best prices they have locked in for more than a decade pursuant to winter contract pricing (for the winter of 2016-2017). I ABSOLUTELY RECOMMEND that you buy a percentage of your expected 2016-2017 needs in the immediate future.

If you are new to the blog or have forgotten the wheel, here it is:

PROPANEWHEEL

In the three years since creating this graphic (which is hardly earth-shattering but a good reminder of the base fundamentals that have driven our business through the years), exports have greatly overshadowed Petchem consumption. The Petchem number used to be a big ‘tell’ and a valuable piece of knowledge in our industry. Now, in comparison to the exports volumes we can ship out of our country, petchem values take a back seat.

As for where we are on the wheel right now, we are nearer to midnight. Our inventory outlook heading into this winter puts us in a fundamentally BULLISH position. It’s also hard to envision a scenario where we don’t come out of this winter with inventory levels south of 40M/bbls, or even 30M/bbls. It would take a massive cancellation of export cargoes to avoid these levels, and for those massive cancellations to happen, we’d need to see propane prices shoot through the roof.

I am not saying the clock is striking midnight just yet…I believe there is more upside pain to come…because there can be seasonal variables that can exacerbate or minimize the base fundamentals…such as weather.

Food for thought; we have never experienced a cold winter with our current level of export capacity.

Jon Miller

Marketing Representative for NGL Supply Wholesale in Tulsa Oklahoma. Follow me on twitter @PropaneBuzz

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