I wanted to pass along a few things that I am hearing related to the propane markets that could have an impact on pricing the rest of this year.
EXPORTING: This country’s propane export numbers are two to three times higher than they were a year ago. The exporting capabilities doubled in January and will double again in the United States is soon to transition from the world’s leading importer of oil to a net exporter. Of course, we have several new shale oil fields that are contributing to this, which will help with propane supplies. However, large scale impact on available propane supplies could be mitigated by several factors, including American exports. Furthermore, facilities that used to be equipped to handle propane importing are being converted to export facilities.
This could turn out to be a scenario where the markets ship it out as fast as production can crack it. We’ll know more about this impact one year from now when the alleged ‘glut of supply’ timeframe hits, but don’t forget this; propane will flow south of out Conway to Mt Belvieu due to new lines and the Cochin Pipeline will be reversing directions and flowing north, which is gas leaving the heart of the Midwest.
We will talk more about these factors next year, but the long term supply picture looks more bearish than bullish, and by long term I am talking next year and beyond.
Global economic factors may come into play with regards to just how long these imports will keep up at high levels. China’s economy is showing signs of weakening and the stock market could become a driver for downward pressure and buying opportunities.
PETROCHEMICAL DEMAND: Petchems have been cracking in the mid 450’s for a few months now and were over 500 this winter. The economy can crimp this and other feedstocks can become more favorable but for right now propane consumption is very, very healthy. If it continues it will have an impact in just how much inventory will be built related to the national scene.
SHORTS: The trading and financial communities have been shorting propane and they continue to buy the current months and roll their short positions forward. This is creating pent up demand and could lead to wet barrel problems when we get to the mid to latter part of the 4th Quarter, especially if we have grain drying in the Midwest and/or early heating. If those things happened it could get downright challenging in October and November both at the terminal as well as in the markets. Do not discount this factor…even if other factors begin to turn bearish, this will continue to be ‘in the market’ until the shorts are covered. Given the sentiments that prices could ease up next year, it reminds me of the old trading adage; “you never make a bad trade, you just run out of time.” In this instance, they just keep kicking the can down the street, rolling it forward looking to cover later at better economics. Dealers (meaning you) will be competing with traders and the financial institutions for purchases.
INVENTORIES: Eastern Canada “is empty” is what I was told by one of our traders. Mid-Continent inventories are nearly 8MM/bbl below where they were one year ago and they are 1.5MM/bbl below the five-year average. We saw a build this week and it will be very interesting to see where things get to over the summer. It will be surprising if we get to last year’s levels, but not impossible.
SYNOPSIS: If we have any grain drying to speak of and/or early cold snaps, there could be some interesting times related to price and wet barrel availability, because most people on the trading side of things will be looking for timing. Some have opted out of storage this year and they will have to be in the wet barrel marketplace, which again is ‘looking for timing’.
I don’t want to paint a picture that looks like ‘everything is bullish’ or ‘the sky is falling’ because that’s rarely the case. While I feel there are fundamental bulls in the market place, if the economy tanks or stock market gets zapped and/or if crude slides down $10/bbl, propane has room to fall.
In the end, you just have to be comfortable with your position and what you think you will need as well as your risk tolerance. Do you think the market is more likely to drop to $.8500/Conway or move up to $1.15/Conway come the 4th quarter? I’d wager we’re more likely to see the latter than the former; possibly a dime or so risk to the downside but a quarter risk to the upside. I strongly believe that if you own gas between .9400 to $.9800 at Conway right now, which is where much of the winter storage gas has been sold this year, you will be glad you have it. As always, cost averaging your needs is strongly recommended when prices are at these levels.