he Mariner East 2 pipeline is finally up and running. It’s taken years to get to this point, year’s past when the industry believed this project would come on line.
The project takes propane, butane and ethane from the Marcellus/Utica production fields over to the Marcus Hook processing facility, on the outskirts of Philadelphia. The propane is ticketed to leave the United States via export.
The Ohio Valley has been an oversupplied propane market for the past four or so years…but that is about to change, to at least some degree. This project has some far-reaching ramifications…it could impact the Chicago marketplace, the Conway and Mt Belvieu trading hubs, which means it has the potential to impact, in some fashion, the United States propane landscape.
In other words, this will likely have an impact on all of us…some more than others.
Chris Cox joins me in explaining these ramifications. Chris is a member of The Propane Buzz team, joining us this month. He comes to us with vast industry experience, having spent time managing supply chain logistics of a large retail organization as well as recently handling all of supply for one of the largest propane wholesale companies in the United States. He is well versed on this project, and given his experience, he can shed some light on the aforementioned impacts.
The video is below, or if you prefer to listen to this in a podcast format, you can do that, too.
(This is the second of a two-part look at the present climate for propane supply and demand. Part One can be found at this link)
For most of my career in propane wholesale, the old comfort level pursuant to propane inventories was 70M/bbls; get to 70M/bbls by the end of September and the belief was that you would make it through the winter without any macro level price spikes.
Given the increased propane production from the shale revolution and the subsequent response, which has been expanded export capacity for LPG’s, we are ‘using’ far more propane on an annual basis than we were four or five years ago. Or rather, demand for American propane is much stronger than it used to be.
As such, the old 70M/bbls of propane inventory by the end of September would now spark a pricing panic and it is no longer the ‘feel good’ level it once was.
I believe the new level comfort is now closer to 100M/bbls and as I have written in recent weeks, I am wondering if we will get near that mark come September of 2017.
LOOKING BACK TO SEE FORWARD
The 2016 rise in crude oil prices had an enormous impact on propane prices this year and has trumped the ‘Lower Inventories‘ factor on the Wheel of Supply as it relates to moving propane prices sharply higher. This type of market movement is outside the Wheel of Supply and Demand, because it is not a fundamental movement based on propane elements. This type of movement tends to be shorter lived, unless the driving factor is based in fundamentals. The crude oil rise has been based on supply and demand fundamentals for that liquid, so this rise has had legs and continues to be a part of the propane outlook going forward:
We’ve seen a $.30/cpg to $.40/cpg cent run up in propane prices since the beginning of Fall 2016 and a greater than $.50/cpg rise since January of 2016, so this has not been a short-lived endeavor.
Given the likely record seasonal propane drawdown we could live out this winter, spurred on by propane exports (which do not show a sign of waning any time soon), we could come out of this winter at inventory levels in the 40M-45M/bbls range, which I have written about in recent weeks and something OPIS wrote about on Monday of this week. You’ve read what I have thought on the matter, here is part of what OPIS had to say:
“”Going forward in January, EIA has now reported 11.9 million bbl of drawdown to get to 72.2 million on Jan. 13. All sources report a warming trend in place for this coming week, to be followed by another stretch of prolonged cold. The way the calendar is arranged this year, two more weeks of January only gets to Jan. 27, so there are four days to follow the final weekly report. It seems reasonable to suppose that the final tally would show a full-month drawdown of 22-24 million bbl.
A January drawdown of that magnitude would exceed the previous January record of 18.65 million bbl, set in 2003, by 3-5 million bbl. That would indicate an end-January inventory around 61 million bbl. From that point, it would be reasonable
to suppose that the final inventory at end-March would bottom out around 45million bbl. That is exactly where EnVantage puts the season’s-end number for this winter””
If we have a similar propane stock build this April-September as we had one year ago, that puts us at 90M-95M by the end of September…BUT exports could be stronger this year than they were last summer, which would slow the rate of inventory replenishment.
That said, given the expected strength in crude oil pricing this spring and summer (some investment houses are calling for crude to get into the $60-$70/bbl range) we may also see stronger propane production than we experienced one year ago.
The only way for exports to slow down would be for propane prices in the United States to reach a level to where global consumers could import propane cheaper from the Middle East than they could from United States based producers. This does not account for preexisting take or pay export contracts.
We’re not there yet; we’re not to the point where American propane is no longer economically viable for the export market. That says a lot, given that Mt Belvieu propane has been trading over $.8000/cpg at some points this week, as it is right now. Propane continues to flow south from the Conway markets for Mt Belvieu export, which is beginning to put a strain on Conway supply stocks. If February gets and stays cold, things could get interesting in Conway….
Here is a supply and demand scenario we put together to take a look at some possibilities. The numbers represented in this image come from the EIA’s Monthly Supply and Disposition Report.
Data in the TOTAL PRODUCTION column adds an additional 10% of production on top of last year’s production totals. I have increased exports by 15%, given that the average export value between February 2016 and September 2016 averaged 740,000/bpd and I believe we will stronger levels this year for the same period. We have estimated total demand to increase 4% this year.
Draw your attention to the September-17 line under the ‘Ending Inventories’ column:
You see that number as being 85.8…that represents an estimate of 85.8M/bbls of propane in national inventory at the end of September 2017, which has historically been the point in time where propane inventories STOP building.
This is only an estimation on my part, and I have explained to you the rationale behind the input variables. If production were to increase 15% YoY (Year over Year) with all other variables remaining constant with my spreadsheet data, then the end of September 2017 inventory number would be near 98M/bbls…or six million barrels below last year’s build. If production increases 10% and exports increase 20% YoY, the September 2017 inventory levels are near 76.8M/bbls.
If inventories build back to around 85-90M/bbls, and crude oil is trading in the $50-$60/bbl range, then propane prices should remain firm. If we see huge production this spring and summer and OPEC doesn’t honor their production commitments, sending crude oil back into the $40’s, propane prices will likely be softer. But if propane prices get softer, you could see exports levels increase, and increase rapidly.
If we only built back into the high 70M/bbl range of inventory, wholesale propane prices would likely spend much of next winter north of $1.00/gallon, if not well north.
The increased propane export capacity I began writing about two years ago is here, and its impact on our industry is downright staggering. This ‘demand factor’ is also far more nimble than traditional propane demand channels, because it can ramp up and back off hundreds of thousands of barrels per day from month to month depending on the trading arb.
In the past, the only thing the propane industry has experienced which had that level of ‘swing’ to it was seasonal home heating demand and petrochemical demand, but petchem consumption would shift tens of thousands of barrels from month to month, not hundreds of thousands. The magnitudes of scale are incredible, which makes predicting the future even more challenging than ever before.
This is why I place an even stronger faith in the strategy of cost averaging, pursuant to your propane fixed priced contract purchasing decisions. Taking smaller bites and shooting for a solid blended average cost, as opposed to putting all of your eggs in one basket, is a tried and tested strategy.
Propane prices in the out months, meaning what you can lock in for contracts for 2017-2018, are not too much higher than what you are paying at the rack right now. Several of you have begun your cost averaging process for this coming winter and if you have not dipped your toe into the water as of yet, it’s something you should definitely consider.
I don’t believe we’v seen the peak for pricing for this winter, or for next year’s contracts. If crude oil stays strong in 2Q2017 & 3Q2017, and if propane inventories build back at a rate slower than last year, that should create upward price pressure on winter contracts for the next home heating season beyond where we are now.
The challenge is we will not have more concrete direction on these factors until 2Q2017…and if they show up bullish at that time, the opportunity to lock in ‘lower’ values could then be in the rear view mirror.
Say it with me; take smaller bites and cost average. The worst thing to do is to do nothing at all, regardless of where you purchase your gas.
WEATHER UPDATE: Here are some recent weather items, listed chronologically from oldest to newest:
Alaska ridge really starting to pop now in the latest ECMWF Ens. Over +300m anomaly. Means periodic return of cold US pic.twitter.com/5kBy89Ea1l
— Michael Ventrice (@MJVentrice) January 27, 2017
— NY NJ PA Weather (@nynjpaweather) January 27, 2017
The CFSv2 month ahead forecast has been a roller coaster ride with February pattern. Hope you've been enjoying the ride 👀 pic.twitter.com/o8rFKgNvOF
— Michael Ventrice (@MJVentrice) January 27, 2017
(JON NOTE: This is an evolution on what the American model has been forecasting for February, each day over the past 10 or so days…it began with a cold look, then moderated, and is now moving back to a colder look)
The stratospheric vortex displacement has begun. pic.twitter.com/fw00Bvju2M
— Michael Ventrice (@MJVentrice) January 27, 2017
— Kirk 🌽 Hinz | BAM Weather (@Met_khinz) January 27, 2017
A period of cold looks likely to open February across the northern tier. Some snow likely along with this as well. pic.twitter.com/aTuLFsjOTi
— Ed Vallee 🌽 Vallee Wx Consulting 🌾 (@EdValleeWx) January 27, 2017
Just a massive Siberia block setting up in the med-range model guidance now. pic.twitter.com/Uwb7paqsAk
— Michael Ventrice (@MJVentrice) January 27, 2017
Eurasia block will help to consolidate PV closer to North America during front half of February. pic.twitter.com/QFYO2Bvfbs
— Michael Ventrice (@MJVentrice) January 27, 2017
Have a good weekend.
THE WHEEL OF PROPANE SUPPLY
I created this graphic back in December of 2015 to help visually explain the ebb and flow of propane prices. This is what it looked like back then:
In that December 22nd, 2015 Propane Buzz write up, I offered, in part:
“I think propane retailers have an opportunity right now to lock in some of the best contract prices they have seen in for more than a decade, for the winter of 2016-2017. I ABSOLUTELY RECOMMEND that you buy a solid percentage of your expected 2016-2017 needs in the immediate future.
I believe the downside risks for next year are DWARFED by the upside risks. The propane exporting rise is real and it’s coming.”
I don’t get every call right, but I got this one right.
The aforementioned propane exporting information I shared in that post pointed out how we were heading towards 1.2M/bpd to 1.5M/bpd worth of propane export capacity, and how such takeaway capacities would help to peel away the propane supply glut that we had been building since the end of the 2013-2014 home heating season.
On December 22nd, 2015, the Mt Belvieu OPIS propane average was $.3268. Prices would fall to $.2950 as of January 19th, 2016, which was a decadal low. Just over one year later, propane prices have risen more than $.5000/cpg at both the Mt Belvieu and Conway trading hubs.
That’s FIFTY CENTS PER GALLON. That’s the essence of the ‘downside risk is DWARFED by the upside risks.’
In September of 2016, we experienced our first ever weekly export report where more than 1M/bpd of propane left the United States.
In my 12/22/15 write up sampled above, I mentioned that we could see some considerable inventory draw downs for the winter of 2015-2016. While we didn’t have much winter weather to write home about, we did experience a 39.7M/bbl drawdown Dec-Jan-Feb, which was the largest drawdown during that time of year in history….and we will blow by that record this year.
As I have been writing in recent weeks, we experienced the second largest December propane drawdown in history just last month and as I wrote yesterday, we are on pace to have the largest January inventory drawdown in history. The drawdown of 7.4M/bbls from two weeks ago was the largest weekly in the history of the weekly EIA reports.
To put it another way, we are on a pace for the largest winter season inventory drawdown in propane history and this winter hasn’t been all that great. As I have written before, the home heating segment of the propane industry is now the tail on the dog, but it does not wag the dog. The big dog is the export market and it is our new overlord which will make it harder to anticipate propane movements. I will explain that more tomorrow.
As things turned out, those who purchased propane contracts in December of 2015 and January 2016, as I was strongly urging at the time, have done quite well this year pursuant to replacement costs.
But let’s discuss the future, not the past…which leads me back to an updated look at my Wheel of Propane Pricing and Supply:
Placing the ‘You Are Here’ arrow isn’t as simple as it once was. We have moved from roughly 7 o’clock on the Wheel of Supply 14 months ago to 11 o’clock on the wheel right now by bypassing the ‘Lower Inventories‘ fundamental factor. That can happen when you have geopolitical events that upset the trading markets OR when other liquids are dragging propane along, namely crude oil, in addition to the propane export marketplace.
Tomorrow, I will examine that ‘drag along’ we have experienced, the incredible impact propane exports are having (and will have) on our markets, offer some propane inventory projections for the coming year as I attempt to paint a picture for contract supply strategy plan for 2017-2018.
WEATHER: I can’t leave you without sharing some updated weather thoughts from the meteorological community:
— Ed Vallee 🌽 Vallee Wx Consulting 🌾 (@EdValleeWx) January 26, 2017
Using day 15 GEFS teleconnections, used analogs to compute a day 15-25 map and CFSV2 run comes up with same thing
Forward into the past! pic.twitter.com/wYVZaJIf4K
— Joe Bastardi (@BigJoeBastardi) January 26, 2017
All models agree… The return of Winter in the second week of February. pic.twitter.com/8lzcLtMBqF
— Michael Ventrice (@MJVentrice) January 26, 2017
— Michael Ventrice (@MJVentrice) January 26, 2017
Commercial weather service provider MDA is even writing about colder risk for February in their morning report…they have been fairly skeptical of the cold most of this winter. The biggest question remains; will the cold hit and stay or come and go? This winter, the latter has been the case more than the former.
Good Monday to you. Here is the latest from the world of energy as it relates to propane and the things that influence our industry. The embedded tweets below are ‘clickable’ to where you can see the images and or story links in a separate window.
October temperature analogs pointing to stubborn SE ridge, increasing cold shots in the Northern Plains/Midwest. pic.twitter.com/64jJdrlEE9
— Ed Vallee 🌽 Vallee Wx Consulting 🌾 (@EdValleeWx) September 19, 2016
Perhaps we can get a bit of a jump start on the home heating season in the upper Midwest…and any corn that is left in the fields as farmers go get soybeans first will dry down in the fields slower with colder temps.
Here is a precip model run from the same source:
Latest October analogs point to variable precip OH Valley->western New England. Note dry look eastern New England. pic.twitter.com/SIn2BrAf8w
— Ed Vallee 🌽 Vallee Wx Consulting 🌾 (@EdValleeWx) September 18, 2016
Not to mention more wet weather is on the way in the near term
US GRAIN WX ALERT – more rains in 1-5 day & widespread Heavy raiins 6-10 day
EURO Model= Impressive rains pic.twitter.com/R3kComrelT
— WXRISK.COM (@WXRISKCOM) September 19, 2016
And then another model run for winter precip (left) and temps (right)
— ☀️Michael Clark🌽 (@Met_mdclark) September 18, 2016
— ☀️Michael Clark🌽 (@Met_mdclark) September 18, 2016
On a side note, I really enjoy following Michael Clark’s updates. I do not know him personally, I have no affiliation with him or his business, but I tend to like folks who are not afraid to give opinions, as opposed to those who offer milquetoast analysis.
This last weather item for the day is an interesting read. Well, I found it interesting but I am a bit of a weather nerd. But given how La Nina and El Nino states can affect our industry so much, I think it’s worth the read if you have some downtime.
— John Kemp (@JKempEnergy) September 16, 2016
— John Kemp (@JKempEnergy) September 19, 2016
Given that good deal of propane comes from Natural Gas, this is worth watching.
— FP Energy (@FPEnergy) September 19, 2016
As I have said several times, I will believe this when I see it. Still, crude oil is up $1.00 this morning and propane prices have been rising for over a week. The rise in propane prices doesn’t make a great deal of sense given how much inventory the industry has as a whole…but we are beginning to see some demand pick up in the Midwest as some areas are beginning to dry down corn.
In advance of next week’s OPEC meetings, we have this:
HEDGE FUNDS raised combined net long position in Brent + WTI by +26 million bbl to 555 million in week ending Sep 13 pic.twitter.com/miysYUPTnS
— John Kemp (@JKempEnergy) September 19, 2016
I am still leaning towards OPEC not agreeing on a freeze…but we shall see.
I’d like to begin by saying I am not an economist, and the tentacles of the Brexit ‘Leave’ vote are far reaching, embedded in global markets in ways I cannot possibly foresee and in ways I doubt anyone can truly foresee.
This item is less crystal ball and more call to action, or game plan.
Great Britain voters have chosen for their country to leave the European Union. I was up late watching the financial shows and I have been up early watching the financial shows, as I believe we’re watching a significant moment in global economic history.
The ‘early returns’ have been predictable; selling off risk assets an diving into ‘haven’ assets like gold miners, stock exchanges around the country taking a nose dive and for interests specific to our industry, crude oil saw a big drop in overnight trading.
WTI Crude Oil closed at $50.11 on Thursday, as most pundits believed Britain voters were cast their ballots to ‘Remain’ in the EU. As news began to break last night, a sell-off in crude oil began. As I begin writing this item at 7:45AM Central Time, crude oil is off over $2.00/bbl and below $48/bbl. WTI was as low as $46.70 overnight, roughly around midnight eastern.
Since then, crude has actually rebounded over $1.00/bbl, but today’s market has not opened as of yet, so trading volumes will be higher here in short order.
In times of turmoil of this nature, I tend to look at fundamentals for longer term guidance; crude oil supply and demand levels are closer to being in balance than they have been in several years, which has helped to send crude oil from it’s January lows of below $28/bbl to recent highs over $50/bbl.
That said, the larger fears at this time is ongoing financial fallout across the globe and a potential drop in crude oil demand. Crude oil was traded down below $47/bbl last week on fears of a Brexit. France, Italy and other EU members are voicing their interests in their own referendums on leaving the EU. This level of financial contagion is a concern, but again, none of us has a crystal ball.
Thought we cannot predict the future, we can plan for the future.
IF WTI crude moves down, moves down more than it has today and continues a downward trend for the next week or so in the face of the Brexit, you need to have a plan to take advantage of such movements.
You should strongly, STRONGLY consider a strategy to cost average, to layer in smaller purchases for winter contracts, as WTI moves down, for as long as it moves down.
You may be thinking, ‘Jon, this is your answer on most days,’ and you would be right about that. It’s a tried and true discipline that has worked for retail propane owners and operators for decades.
Why wouldn’t I strongly and repeatedly advocate for a plan that works, a plan that is fiscally responsible and one that does not require you to ‘place a bet’ on an arbitrary number, putting all your eggs in one basket?
Every financial planner worth his or her salt advises their clients to ‘diversify your portfolio’. That’s what cost averaging is to your LP business; buy employing a disciplined cost averaging buying strategy with propane, you are diversifying your propane portfolio.
For example, say you still want to buy 1 million gallons of fixed priced contracts for winter. Your number may be higher or lower, so you can adjust the following example to fit your situation.
Buy 200,000 gallons at $Z.ZZ price
Buy 200,000 gallons two cents below $Z.ZZ price
Buy 200,000 gallons four cents below $Z.ZZ price
…and so on.
You can choose your numbers, your price point, but regardless of what those numbers are, put a plan in place similar to this.
Some folks still bristle at this strategy, thinking they can ‘hit the low’. I can tell you this; I began wholesaling propane in 1996. I have yet to meet anyone who bought all of their winter prebuy needs at the low of the year. On the other hand, I have had several clients who have bought a piece of the low, and then layered in other pieces at higher price points.
At the end of their buying cycle for that particular year, they typically wound up with a better average contract price than those who weighed in with one or two large volume purchases.
Today will not be a fun day in financial circles. WTI crude oil is going to get its nose bloodied, as it already has. Propane prices have already opened a penny and half per gallon lower as of 8:10AM Central.
Now would be a good time to put in buy orders, price points that you would like to buy propane at, and either begin cost averaging or continue to cost average. In the end, I truly believe you’ll be glad that you did.
So what does the Brexit mean for our business? For those of you who have more gallons to lock in at fixed prices for the coming winter, it likely means an opportunity for a pullback on propane prices. Resist the temptation to put all your remaining eggs in one basket and consider stair-step purchases on the way down, because once the market turns around the other way, market fundamentals continue to suggest there is additional upside beyond what we have already experienced this year.
We saw the long expected crude inventory draw yesterday along with those markets responding in an expected fashion, and that means values are higher in propane.
The graph below represents daily average spot pricing in Mt Belvieu (MTB), which helps to set prices on the Dixie pipeline and into the Ohio Valley and Northeast:
The point farthest left is May 13th, 2015. The MTB average that day was $.51125, with the high that day reaching $.5200. There was a day in early October of 2015 that came close to those levels, but did not eclipse them.
This morning, as crude oil took off at the open and was up nearly a dollar per barrel over yesterday’s close, $.5200 was traded in MTB, which marks the first time that has happened since May 13th of 2015, or 366 days ago. Being this is a leap year, that’s one year ago exactly.
The story is similar in Conway, where $.4900 traded this morning and the last time that happened was April 20th of 2015.
As of this writing (9:10AM Central), crude had backed off it’s early morning high point of $47.02/bbl and was in the mid $46/bbl range.
Domestic crude production dropped again this past week, helping to fan the flames of the latest rally, along with the 3.4M/bbl draw in domestic inventories.
Propane prices have responded in kind, with winter contract values up a penny and a half from yesterday’s close. If crude pulls back as the day goes on, I would expect propane values to come off their early morning highs, but we still may finish ‘up’ on the day.
There is a great deal of pent up contract buying demand in the propane industry. While some folks began their cost averaging strategy back in January and February, or $.2000 cents ago, there is far more gas yet to be bought than has been bought. When buyers step in, the markets certainly don’t fall.
When you have a lot of people waiting (hoping) for the same thing to happen, you have a built in challenge for that ‘thing’ to happen, or at least, for it to happen to the levels you would like to see.
We’re going to cover quite a bit of ground here, so grab a cup of coffee and let’s do it:
WHY ARE PROPANE PRICES MOVING UP?
Propane supply and demand fundamentals ARE NOT responsible for the $.0700/cpg price run up in propane prices since April 7th, or the $.2000/cpg run up since January 19th.
The culprit is crude oil, and we are going to be living in a crude oil world for the foreseeable future. Propane inventories are at 71.2M/bls at the present time, which has us headed towards more than ample supply for the coming winter.
In a column for Reuters, John Kemp lays out the reasons for the run up in crude oil prices. Kemp is someone I have referenced before and will reference again, as I enjoy his analytical approach. His entire column would be well worth your time to click and read.
CRUDE OIL HEDGE FUNDS
I’ve reference them before, and how they can take long or short positions which can move the markets. Kemp says that present net-long crude contract positions have“surpassed previous peaks set this time last year (572M/bls) and before that in June 2014 (621M/bls).” He also adds that “Since the start of 2015, there has been a close correspondence between the accumulation and liquidation of hedge fund positions and short-term movements in oil prices.”
Crude stocks in the United States and around the world are ample, as in near record levels. However, the widely held expectation is for crude oil supply and demand fundamentals to come into balance sometime in the 3rd or 4th quarters of 2016, or the second half of this year.
That’s been a popular opinion for the last several months, and one of the reasons why I felt we’d see a 2Q16 propane price pullback. There was a pullback, but it was a pullback from a much higher level than what we saw in February; we saw a nickel drop in propane prices between March 11th and April 7th. Since April 7th, prices have been moving up and to the right:
We are now $.0700/cpg higher than we were on April 7th.
DEMAND FOR THE OIL
Kemp cites domestic gasoline consumption as one factor pushing up WTI crude pricing, and more gas guzzling vehicle purchases have been seen in recent months than in the past 18 months.
The global economic outlook has also improved in recent weeks, with Kemp saying the“worst of the commodity-slump-induced shock behind us.”
We’ve seen domestic crude oil production fall for the past seven weeks. We’ve seen domestic rig counts drop to below 400 from 1600 nearly two years ago. That’s a total drop in domestic crude production of 500K/bpd between April 2015 to January 2016, according to Kemp. He also says forecasts are for another drop of 960K/bpd by the end of this year.
Here were Kemp’s parting words:
“The two sides of the oil market are now rebalancing rapidly in response to the plunge in prices over the last 20 months. Like any commodity market, the oil market is forward-looking. Just as it began discounting the emergence of excess supplies in the summer of 2014, it is now discounting the emergence of excess demand in spring 2016. Like other markets, oil is prone to overshooting; it can be argued plausibly that prices have risen too far, too fast. But it is also true that market fundamentals are now changing quite quickly; and it can also be argued plausibly that hedge funds are simply reflecting and accelerating that shift.”
Perhaps I appreciated this article because it was in line with what I have been seeing, saying and writing for the past several months. Nothing like a good round of confirmation bias to make a wannabe analyst like myself feel good first thing in the morning. But these things just make sense.
I think this oil price run up ‘feels’ premature, but it’s something that most people expected to see at some point this year. The anticipation of the rebalancing of crude oil supply and demand sometime in 2016 is what led me to speak confidently about my expectation for 4Q16 propane values being higher once we get there than what you could buy them for, back when we were in 1Q16. I have some clients who own 4Q16-1Q17 contracts nearly $.2000/cpg below where current contract values are.
WHERE TO FROM HERE?
So we exist in an environment where the experts have expected a run up in prices at some point this year. We are seeing that happen BEFORE the fundamentals have rebalanced, rather, based on the expectations they will balance as the data points towards that happening this year. We are also seeing the crude technical chart heads having their day, as the technicals are still bullish.
Spot propane values in Mt Belvieu are presently 45% that of crude oil, or below the historic propane to crude oil ratio.
In February, I wrote a piece on the historic relationship between propane and crude oil, and how things were coming back in line with history.
Here are a few sentences from that item, where I used a 50% propane to crude ratio:
“What if we see crude at $40/bbl? Using a historically safe value of propane at 50% that of crude, you have propane at $.4762/gal. What about crude at $50/bbl with a 50% ratio? That’s $.5950/gal propane. $60/bbl crude at a 50% ratio would be $.7143/gal.”
Spot propane at Mt Belvieu is hovering around $.5000 right now. Crude oil prices are $46.50 as of this writing. As you can see, those hypotheticals I wrote about in February are near the mark related to propane’s value were crude oil to make a run.
However, this has all happened much quicker than most anyone thought it would, but here we are.
Does crude oil have more upside for this year? I think it does. I think we’re going to see crude in the $50.00/bbl or higher range at some point, which means propane values would be higher when that happens.
We’re probably to the point where ‘planning’ on a big propane price pullback is more along the lines of ‘hoping’ for a big propane price pullback. A cost averaging strategy is still your friend, even if some of you have missed out on what is sure to be the lows for the year.
Conway propane supply is getting tight. It would not surprise me to see a wet barrel premium situation in that marketplace this coming winter. La Nina winters are typically colder than normal north of the Mason-Dixon line. Throw a cold winter on top of tight supply in Conway, and the relative calm we have enjoyed in the propane industry the past two winters will be gone.
I am not saying that WILL happen…what I am saying is the elements for something like that TO happen are beginning to come into view. Even Kemp had a weather related comment in his article:
“But with La Nina conditions building up quickly near the coast of Peru, there is a strong likelihood that winter 2016/17 will be cooler and boost fuel demand.”
When this is all said and done, nobody can say they didn’t have a shot at cheaper contract propane, or that the fingerprints of a price run up were not visible or discussed. Elements just manifested quicker than some were prepared for.
Propane inventories continued their seasonal build this past week, with a robust 2.2M addition to robust end of winter stockpiles.
The industry sits at just under 72M/bbls of propane right now, which is well above historic seasonal averages. While I know for a fact that propane production levels are off in some areas of the Marcellus and Utica shale plays, production elsewhere isn’t being hit as hard. Take a look at the innards of the last three EIA reports:
We saw a spike in production this week over last week of 89K/bpd. Demand was off nearly 100K/bpd week over week while exports rose 56K/bpd to 699,000. Imports were also up slightly. The net effect was 323K/bpd more propane supplied than propane demand, for the 2.26M/bbl build.
Crude oil also showed a build in the EIA’s where last night’s API’s showed a draw. Last night’s API report sent crude soaring in overnight trading after yesterday’s 2016 high close of just over $44/bbl. Crude traded over $45/bbl this morning, but after the EIA report showed a build, it backed off $44.40, or up $.35 cents on the day, as of 11:15AM central time.
Propane prices are up on the day as of this time, roughly a half cent or so, but they are a half cent off their early morning highs.
Crude oil continues to be the driving force behind propane prices. As mentioned last week, one can read totally divergent articles and opinions on the direction of crude oil each and every day. It fascinates me that people who analyze crude oil for a living can see things from a polar opposite perspective on a regular basis.
The consensus opinion, or at least what I believe the consensus opinion to be, is that crude supply and demand fundamentals are still set to get back in line sometime this summer, in the third quarter. Keep in mind that we are in the timeframe for what is traditionally the ‘peak’ of United States crude oil stockpiles; that typically comes around week 17 to 19 of the calendar, and we are in Week 17:
US CRUDE STOCKS rose +2.0 million bbl to 540.6 million bbl in what *should* be their seasonal peak last week or this pic.twitter.com/8R8O6BshS5
— John Kemp (@JKempEnergy) April 27, 2016
That said, we’ve seen hedge funds add crude length to their positions in recent weeks during this run up. We’ve seen the Mt Belvieu (TET) daily OPIS average move from $.2950 on January 19th to a 2016 high of $.4800 on April 26th, an increase of nearly $.2000 cents.
We saw prices of nearly $.4800 on March 11th, then a nickel pullback point on April 7th. But that nickel has evaporated in recent weeks.
Will that dip wind up being the second quarter pullback I was looking for? Will there be another one? If there is another one, does it just get us back to where we were on April 7th, which was still a dime on an outmonth contract basis than things were in January?
Follow crude oil, because propane is.