I am going to share a few things here which have happened this week that are interesting and a bit spooky related to propane supplies. I’ll add in the caveat that I cannot know whether things like this will continue to play out on a wide scale but I felt they were worth noting.
Just this week we have seen a couple instances of some production shut ins and/or supply curtailment related to the low price of propane.
While I cannot get specific on this, I can tell you what I will write is entirely factual.
I know of one refinery which produces propane and other liquids that is not going to ‘sell’ its propane given current conditions. I emphasized ‘sell’ because the reason they are choosing not to take it to market is because they would actually wind up losing money to sell it after production costs are factored in. They would wind up paying people to take their product.
So instead of selling it, they are going to do a combination of things, mostly flaring the product and using it to power their facility.
I know of another company that is curtailing some summer contracts because the prices are so low. I know of some North Dakota (non-Bakken) product that is being sold in some areas in the single-digits right now, where there is some product in the Marcellus-Utica region that is going below $.2000.
I am going to begin adding a provision to every index deal I sell going forward that the product must sell for at least $.0100, just to be safe.
These times are unprecedented when you adjust for inflation. We saw prices in the low $.2000’s and high teens at the hubs in the late 1990’s, but this is a different era of supply. The hubs are still important but in the late 1990’s prices were nearly entirely hub-driven. Now we have more refineries, we have shale production that has to go someplace and you can see more regional variances in pricing based on your proximity to supply.
We also have inventories at very high levels, as you can read here from what I posted yesterday and also what I will share again below.
So when you have so much propane, you get depressed pricing. The beautiful organism that is the free market begins to look for balance or rather, if left unregulated, it will find balance. How does it find balance with historically high inventory numbers? Historically low spot pricing. What happens when you have historically low spot pricing? Supply can begin to shut in, producers will look for any way possible to make less propane or find other uses for it or in some instances, just flare it off.
What can happen then? The pendulum swings the other way.
The propane marketplace doesn’t seem to hang out in a happy medium for very long. In fact, it seems to race right by medium like a blur, waving as it goes, from one side to the other.
Consider this; roughly 16 months ago, we saw prices moving twenty to fifty cents per day, sometimes in an hour, as the late January 2014 supply crisis reached its apex. JUST 16 MONTHS AGO!!!! Those were the highest prices in history….and now, 16 months later, we are seeing some of the lowest prices most of you have ever seen.
The propane whipsaw never sleeps…she just builds quiet and sometimes imperceptible momentum to swing back the other way like a runaway freight train. That will happen again at some point, so don’t fall asleep on the tracks.
Here is a re-post from this week’s inventory report that I posted yesterday:
Propane inventories are higher again this week, increasing by 2.2 million for a current total of 73.2 million, as reported by the Energy Information Administration as of 5/22/15. Inventory is 31.1 million above 2014’s inventory level at this time and 23.4 million above the 5-year average of 49.8 million.
Regional inventories continue to build. Midwest up 500,000 to 18.7 million; Gulf up 1.0 million to 47.9 million; East up 600,000 to 4.1 million; and West up 100,000 to 2.6 million.
Historical Averages: Midwest is 3.9 million above last year’s inventory level and is 2 million above the 5-year average of 16.7 million After last week’s report, the Midwest was 2.3 million above the five-year average, and this variance has been getting smaller and smaller the last six weeks. Gulf Coast inventory is 25.2 million above last year and 20 million above the 5-year average of 27.9 million. East Coast is up 1.1 million from last year and is up 600,000 from the 5-year average of 3.5 million.
Propane imports were up 17,000 bpd to 92,000 bpd. East Coast flat at 26,000; Midwest was up 18,000 to 58,000; Gulf was flat at zero bpd and West down 1,000 to 8,000. Propane exports increased for the first time in 3 weeks, up 21,000 to 449,000 bpd.
Other Inventory Numbers:
Crude Down: -2.2 mm to 1,171.2
Motor Gas Down: -3.3 mm to 220.6
Distillates Up: +1.1 mm to 128.8
Keep an eye on propane exports in the coming weeks. Export capacity will grow a great deal this summer and United States propane prices are cheaper than anywhere in the world.