Guessing the low, or better yet, buying the low is the annual goal for everyone in the propane industry. Rare is the time where any of us hits that mark but we all do our best to try to figure it out.
I had a few conversations last week with some clients and the question came up:
“Have I missed the low?”
I can understand this concern as we’ve seen crude prices rise for the third straight week.
I spent a good deal of time this weekend poring over as many crude related items as I could find as crude oil is the engine driving this train.
Propane prices are low for two reasons:
1) Record levels of supply
2) The precipitous drop in crude oil pricing
We saw crude lows (WTI) around $44.50 back in January. On January 7th, we saw rack propane prices at their lowest level in years as we were selling rack loads (Conway basis) at $.4250. Outmonth pricing for 2015-2016 contracts were down in the $.50’s. On Friday February 13th, our rack loads relative to Conway were priced at $.5925, so we’re talking about a rise in price of nearly $.1700. That’s a significant rise!
As mentioned, prices for 4th quarter contracts for 2015 were down in the $.50’s at Conway. As of Friday afternoon February 13th, that Conway basis was at $.7125 ($.6975 in Mt Belvieu) We’ve seen a near linear rise in inmonth and outmonth prices, so we’re talking about a rise for next fall and winter around $.1500.
This has led folks to asking whether or not they have missed the low. So where do we go from here?
I’ve said this before and will restate it now; even with propane inventories at record high levels, crude oil will have the most significant impact on propane prices in 2015. There is significant upside in crude oil, once supply is truly cut back or rather, once the cuts that have been made and those that are in the planning stages for later this quarter get factored into the market.
UNTIL THEN and based on the numerous items I have read this weekend, I think there is a chance that we’ll see a pull back in crude oil which should lead to a pull back in propane prices in the coming months, barring any geopolitical unrest that is impossible to predict. If OPEC comes along and changes their tune, that would throw this out the window, too.
I recommend you sign up for a free account at ‘Seeking Alpha’. It’s a great energy market resource and there is no cost. You’ll need a free registration to read THIS ARTICLE, but for those of you hoping for a pullback in propane pricing (which means a pullback in crude), I think you will enjoy this read.
I will post a few highlights here, but they will not do the article and it’s rationale justice. First, this is the summary atop the article itself:
*Since late January 2015, crude oil prices have been staging a recovery.
*However, world oil production still exceeds demand by a significant margin.
*World and US oil stocks are at very high levels, and are still rising.
*The only possible outcome is a further strong drop in Brent and WTI prices. With very high probability, that price drop will happen during the next 3 months.
“In the first 3 days of this recent price increase (from January 30 to February 3) there was a clear market manipulation involved…After that, in February 4 the prices had a strong downward correction, and then went back rising but with more normal daily patterns, and so it can be said that the bulls took over from the early manipulators. They just needed the initial price movement to enter long in crude oil, and to transform the initial oil price movement into a more legitimate (and long awaited) price recovery.
The problem of this oil price recovery is that it comes far too early. At present, the world still has excess production of crude oil in relation to demand (arguably around 1.5 to 2 million barrels per day, in the first 2 quarters of 2015). This excess production needs to be stored (no one will throw away already extracted crude oil), and available storage is getting exhausted.”
The author of the linked article firmly believes that the recent rise in crude oil has everything to do with people seeing what they shone their lights on and some funds choosing to enter in some length in their position given where crude oil prices had dipped to. In other words, this was a technical move, not one based on the fundamentals of supply and demand.
Those fundamentals still show an excess of supply. Back to the item:
“In fact, the US land-based stocks are rising extremely fast, and at very consistent rates. Using numbers from EIA, overall crude oil stocks in the US are at its historic maximum: 1 109 million barrels in February 6, 2015 when including the Strategic Petroleum Reserve (SPR) and at 418 million barrels in February 6, 2015 without the SPR. These February 6 numbers surpassed the previous all-time high established in the previous week (January 30), and one can expect next week numbers to again establish new all-time highs, and so on, until US land based crude oil storage is exhausted.
This reality is even more noticeable if we follow the evolution of the overall aggregate of crude oil and petroleum products (instead of just unprocessed crude oil). In fact, weekly US stocks of crude oil and petroleum products, taken together, established an all-time high in January 2, 2015, and have been beating that record in every week since then! At the present rate, crude oil stocks in Cushing, OK would reach the installed maximum capacity of around 58 million barrels in less than 2 months.”
The article also does a great job in a basic education of how long it takes for crude oil production fall off from the dropping shale rig counts.
Here is an image from Baker Hughes weekly rig count report.
The article has much more detail than what I am sharing here, and I can’t copy and paste an entire article, so I do think it would be worth your time. I must also state that this is just one opinion and there are others out there with similar thinking and fewer who believe the low in crude has come and gone and people have missed the boat.
I do believe that we’ll see the bottom this year (2015). Whether or not prices get back down to the lows we saw in January remains to be seen, but if you place a lot of faith in market fundamentals such as supply and demand, the recent rise in crude oil and therefore propane prices does seem ‘unnatural’ and ‘technical’ or as the item termed it, ‘manipulated’.
My advice is the same as it typically is with price uncertainty; cost average. Create a plan with buy orders in mind as the market dips or rises. Don’t lean in too hard with any one purchase right now, as this will give you room to blend as the market moves and not commit you too much at present levels.
I would also advise this; if we see the markets peel back a dime in the coming weeks or months, I would strongly advise you to lean in pretty hard should that happen.
At some point, the same challenges that await crude oil storage maxing out at Cushing will impact propane storage at Conway and Mt Belvieu. We are going to come out of this winter with ample stockpiles of propane. Costs for storage for next year are already at high levels and may go higher. There is a significant Cantango in propane prices as there is in crude (where the outmonth barrels are more costly than the in month barrels. This is the opposite of ‘backwardation’).
We expect that Cantango, or gap between present and future prices, to widen given the storage challenges that are most assuredly in our future. This may create a situation at some point where inmonth prices are soft, but outmonth prices are not nearly as soft or don’t drop at the same rate as the inmonth.
I don’t think we’re there yet and if inmonth prices drop over the next few weeks or months (dependent on crude dropping) I think outmonth propane prices will drop. But that may not be the case come April or May.
So to answer the question I asked in the headline of this item, I don’t believe you’ve missed out on the market. After reading what I read this weekend, I feel more confident than I did last week that we could see crude oil pull back, although that is not a guarantee.
Don’t just wait for the dips to create your plan; make your plan now and buy on the way down if the dips do happen.
For those of you who have made purchases already, even at the levels we see right now, you’re going to be just fine. My hope is we will see another rally to the downside, which will give you a chance to blend in what you have already purchased. It’s also hard for me to believe that propane owned in the $.7000’s and $.8000’s at the terminal will be a bad thing come next fall and winter.
HAVE A PLAN IN PLACE! Stairs step buy on the way down. If the market drops a few cents, buy a piece. If it falls another few cents, buy another piece of the same amount. This plan is tried and true and you’ll find yourself come May in a great position to take on the coming season.