The month of June has been fairly ‘ho-hum’ as it relates to propane prices.
Monday’s averages closed down a bit from their close on Friday, with Mt Belvieu averaging around $.8950 with Conway down two cents from Friday at roughly $.6775.
That’s still a very strong spread between the two trading hubs, but in the outmonths, the spread, though still robust, is not as wide.
4th Quarter MTB was roughly $.9000 yesterday, while Conway was in the $.7775 range in the paper markets. For 1st Quarter 2019, MTB was $.8625 with Conway at $.7750. The 4Q spread would be in the $.1250 range while sitting around $.0900 in 1st Quarter.
While Conway isn’t sitting flush with inventories right now, there is a lot of production in that market and there is a lot of product arriving there every day from around the nation, with some stranded barrels from the Northeast en route via unit trains due to the delays with the Mariner Pipeline system, as well as Canadian rail product heading that way as well.
An industry trader pointed me towards the PADD 2 (Midwest) EIA data yesterday. PADD 2 is producing 70,000/bpd more propane this year than last year, which adds up to an additional 2.1M/bbls per month. Propane imports are also up roughly half that number, so the country is seeing a net gain in propane ‘intake’ vs where we were one year ago.
It led this particular trader to ask an interesting question; do we (the United States propane infrastructure) need to build as much inventory as we used to in order to get through the winter?
The basis for his point, which is a good reminder for all of us and a point I have tried to ram home over the last year, is that American propane supply and demand is not just an American thing anymore…given the incredible expansion of our propane exporting capabilities and our increased production, additional petchem facilities that have come online or are in the process of coming online, will the market be the device that takes care of inventories, one way or the other?
As this trader pondered, perhaps we are now living in a ‘just in time’ inventory approach.
Right now, the trading arb to the rest of the world is wide open. American propane is competing against global propane production that is priced based on Brent Crude, where American propane is priced based on WTI. Given the sizable spread between Brent and WTI, this won’t likely change anytime soon. Here is the Brent to WTI spread charted over the past year. We are presently near $9.00/bbl (far right)
What’s more interesting (concerning?) is the spread in the outmonths. It’s sitting at $10/bbl for December of 2018 and $9/bbl for December of 2019. Here is how the spread looks out the curve, from ICE, which is the industry’s trading service:
How could that be concerning?
While it’s difficult to make straight line assumptions with anything commodities related, one thought that jumps to mind immediately as it relates to propane and propane inventories is the trading arb stands a decent chance of staying open for a while. I am NOT predicting record export levels over a long period of time, but when the WTI to Brent spreads are this wide, for this long, it makes sense to suggest that some longer term export contracts could get locked in at these favorable economics out the curve.
Mt Belvieu propane is going to have to move higher in order for the trading arb to close for American propane exports. This, in the face of some folks asking me why Mt Belvieu propane is so high?
Right now, Mt Belvieu propane is roughly 58% the value of WTI crude oil, with propane values near $.9000/cpg. That’s within the historic value range and it’s not some extreme outlier. Conway is down in the lower 40% range, which is on the lower end of historic levels.
Is Mt Belvieu high or is Conway too low? Given where crude is and Mt Belvieu’s value to crude, I don’t think I would say that it’s too high, relative to crude. It might feel too high, given the market’s lack of concerns over an inventory shortage for next winter, but the market is certainly not behaving in a way that thinks it’s too high…and where crude goes, propane is going to follow. You’ve heard that before, right?
Crude’s 2018 direction may be set here over the course of the next two weeks, as OPEC meets in Vienna in June.
Let’s circle back around to the ‘just in time’ inventory notion. The gist of the discussion I had with the trader was that perhaps we (the industry) are placing too much emphasis on where inventories will or won’t build to, given this new age of liquidity in production & exports.
As I have written before, we saw a seasonal (October through March) drawdown of over 63M/bbls of propane during the winter that wasn’t of 2016-2017. Last winter was colder, yet we ‘only’ drew down just over 42M/bbls during the demand season of 2017-2018. Exports were incredibly robust in 2016-2017 and exports are the single biggest demand factor in our industry.
But prices began to move up rapidly last summer and in to fall…which helped to close the trading arb, which kept more barrels home and is one of the reasons why we saw hub pricing soften as winter was just getting underway. We had ample propane at the trading hubs to avoid price spikes there (even though we saw logistically fueled spikes off-hub).
So in essence, the markets took care of inventory concerns based on price, as they are wont to do. When prices get ‘too low’, and the trading arb is wide open, that is when we will see a strong spike in exports and perhaps an easing of production. Higher prices will get you more production, and at some point, a drop in exports.
The ‘just in time’ notion is an interesting thought to consider…even though it might not engender the greatest confidence in the hearts and minds of propane retailers.
STRATEGY: I am still of a mind for Mt Belvieu priced clients to lock in contract prices only on what you are committing to a fixed price at for your customers. For those of you in markets where you use indexes to secure your supply, and then fix a price at a later date, you should have already committed to those gallons by now. If not, I would do so as soon as possible. F
or Conway readers, I would suggest a similar notion; if you are committing a fixed price to your customers, then cover those gallons with fixed priced contracts, locking in your margins. For Conway readers who have solid summer fill plans, values are very favorable for you to initiate these programs at the present time.
For Mt Belvieu priced readers, a lot of that depends on the area of the country you are in. Shoot me an email at firstname.lastname@example.org with your region, your preferred terminals and some of the values you are being offered for summer pricing and I would be glad to share my opinions with you.
Late last week, I wrote a post titled ‘The Rise of Propane Production: The Sequel’. We have seen a strong increase in propane production over the past year and I laid out a case as to why we may see that trend continue. My thoughts were centered around the opinion that Saudi Arabia would continue to push for crude oil production quotas within OPEC, as to not send the supply and demand balance out of kilter again, to keep oil prices higher…which would give American based producers the opportunity to capture more global market share and the wheels of production would remain robust, as would propane production.
One of the factors I wrote about was the fact that the Saudi’s will want to keep crude oil prices at a strong level, or rather, at levels between $60-$80/bbl in advance of the launch of their Aramco IPO. The sale of a portion of the kingdom’s oil production industry, which is what Aramco basically is.
This article in yesterday’s New York Times suggests the Aramco Public Listing could now be delayed until 2019.
So we have the Saudi’s with a possible longer-term launch horizon on their IPO, which could in turn lead to them wanting to keep the OPEC quotas/limits in place for the rest of this year and into 2019. However, as this Wall Street Journal article from March 11th discusses, there are other OPEC nations (namely Iran) who would rather see oil prices dip a bit to push some pain into American Shale production, and recapture some of that global market share for themselves.
From the linked item:
OPEC is breaking down into two camps after more than a year of unity. On one side is Saudi Arabia, which wants oil prices at $70 a barrel or higher, and on the other is Iran, which wants them around $60.
The split is driven by differing views over whether $70 a barrel sends U.S. shale companies into a production frenzy that could cause prices to crash. At stake is the Organization of the Petroleum Exporting Countries’ production limits, which are among factors helping the oil market’s monthslong recovery.
Iran wants OPEC to work to keep oil prices around $60 a barrel to contain shale producers, Oil Minister Bijan Zanganeh told The Wall Street Journal in a rare interview. That is a little below Friday’s prices of $65.49 a barrel for Brent crude, the international benchmark, and $62.04 in the U.S.
“If the price jumps [to] around $70…it will motivate more production in shale oil in the United States,” Mr. Zanganeh said. Shale producers are more nimble than big OPEC producers, using techniques that allow them to increase or decrease production depending on the oil price.
The entire article is worth reading, but this is a key dynamic to consider. If there becomes a schism between the Saudi’s and the rest of OPEC (along with Russia, who has been working with OPEC on cuts), the Saudi’s would have to choose whether to bear the burden of the supply and demand balance themselves, or give in and just pump more oil.
In the article I linked on Friday, I had a graphic that showed the break-even oil price level for various nations, dated Summer of 2017. Here is an updated graphic, from International Monetary Fund (IMF)
Libya is at $102
Saudi Arabia: $73
From the article, Iran is more keen on kicking up production and keeping market share away from American producers, more comfortable with oil around $60. As you can see, their break-even price is $57, so they are talking their position.
Then there is this to consider, from the Wall Street Journal item:
If oil prices averaged $70 a barrel next year, it would result in an additional 600,000 barrels a day of U.S. production compared with $60, said Artem Abramov, vice president for analysis at Norwegian consultancy Rystad Energy.
The International Energy Agency said this week that shale production had already risen so much that demand for OPEC crude would remain below the cartel’s current production through 2020. That could pressure the group to limit output for longer than most members anticipated.
These are fascinating chess movements to consider, moves that will have some kind of impact on propane prices for the coming year.