Propane inventories built 1.2M/bbls for the week ending September 7th, 2018. This puts us at 7.7M/bbls behind last year’s pace the same week. We saw inventories hit 82.2M/bbls last year this week, which was the high for the 2017 build cycle; inventories actually drew down the rest of September 2017 to close the month at 78M/bbls.
Mt. Belvieu (MTB) inventories built 700,000/bbls and now sit at 37.8M/bbls; last year, MTB inventories were at 46.7M/bbls at this point before drawing down hard to 41.9M/bbls by the end of September. We may struggle to get to that 41.9M/bbl level by the end of this September, which would put us at the lowest end of September MTB inventory level in the Shale Boom Era (2014).
Conway inventories built just 200,000/bbls and we sit at 25.9M/bbls, which is nearly identical to where we were one year ago at this time. I write a lot more on the Conway and MTB outlooks below.
Crude oil drew 5.3M/bbls, which was less than yesterday’s 8M+/bbl build the API’s showed, but the crude markets are very strong as of this writing, up over $1.50/bbl at around $70.75 following yesterday’s near $1.75/bbl rise. Spot propane prices are also stronger today than yesterday in MTB, but they are not moving in parallel at Conway.
Right now, here are the risk factors dominating the energy space:
1. Tropical Weather: Hurricane Florence is bearing down on the Mid-Atlantic, which is spurring enormous gasoline consumption in advance of the storm, but could also inhibit consumption after it passes…but there is a weather system trying to form in the Gulf of Mexico, off the Yucatan Peninsula, that looks somewhat similar to the formation of last year’s hurricane that rocked Texas.
2. Weaker (at the moment) US Dollar: A weaker dollar typically means stronger crude prices, and vice versa.
3. Falling Iranian Exports: I don’t get this one, as we have known about this for a long time and had been assumed the Iranian risk factor was already priced into crude oil…perhaps it just depends on who you ask. John Kemp of Reuters, a fantastic energy columnist, wrote yesterday about how traders are growing more and more worried about Iranian Sanctions.
4. Physical Demand: It has been strong the past two weeks, but we are entering the time of year when crude oil typically shows weakness in the fundamentals as annual refinery maintenance is right around the corner.
5. Margin for Error Narrowing: On the crude front, there are several key, traditional producers who have seen production fall, or will see production fall. Iran is one of them, but you also have Venezuela and others. This article from Reuters quotes the Russian oil minister as saying they have additional capacity to help meet the shortfall.
6. EIA Lifts Oil Price Forecast: On Tuesday, the EIA raised it’s 2018 and 2019 price forecasts for WTI and Brent crude while at the same time lowering its US production expectations for this year and next.
7. Hedge Funds Increasing Net Longs in Crude: I wrote about this in yesterday’s note to my clients, but hedge fund managers are once again adding to their net long positions in crude, after mostly paring down those positions this summer. Follow the money, because crude prices often do. (this is more about Mt Belvieu than Conway, as I will explain in greater detail later in this item).
CLOSER LOOK AT INVENTORIES
First, let me share a couple of tables with you. The first is Conway inventories by year, their end of March levels, End of August levels, End of September levels, Seasonal Build and Seasonal draw totals, listed by year. The numbers represent millions of barrels. The second table is the same data, but for Mt Belvieu:
I got to tinkering with this data over the weekend and I arrived at a few thoughts.
CONWAY: We are presently experiencing the 4th largest seasonal build of the past 15 years. This is just through August 2018 when the other 14 years are factoring data through September. I do’t believe we’ll eclipse the 2014 seasonal build of 20.1M/bbls, as we stood at 16.4M/bbls at the end of August, but we could eclipse 2010’s 18.6M/bbls for the #2 slot. Simply put, there is ample inventory at Conway, and unless we see colder than normal temperatures in December, for most all of December, I remain of the belief I have held since April 2018 that we could see a collapse in Conway hub prices in the middle of winter, similar to last year. Right now, January Conway is trading in the low $.9000/cpg range…I am having a hard time arriving at any realistic scenarios that would suggest to me we could possibly be near that price this coming January; I don’t see it.
Working Storage in Conway is somewhere around 6M to 8M/bbls…meaning once we get that low, we are sucking brine. If Conway builds north of 27M/bbls by the end of this month, which is possible, that means we have a 20M/bbl cushion before the markets would get worried. In the past 15 years, there has been just one year where the seasonal draw down exceeded 20M/bbls. The five-year drawdown average is 15.28M/bbls.
Again, I struggle to see the support for Conway pricing this winter. The primary source of upside risk for Conway, aside from an historical cold December, which doesn’t seem to be in the cards right now (see this link for last week’s discussion on the December temperature outlook) is Mt Belvieu (MTB) and it’s pricing risks. But there are containment issues in Conway, and only so much product can move south to MTB right now given the competition for products on the pipelines that connect Conway to MTB, and the refining competition that exists in MTB. Could we see the MTB/Conway differential push out beyond $.3000/cpg this winter?
MT BELVIEU: The picture is different at MTB. The trading arb remains wide open and exports are presently robust and should stay that way. End of August inventories (37.1M/bbls) are the lowest they have been in the Shale Boom era (which I believe began in earnest in the spring and summer of 2014). The Brent to WTI differential is over $8.850/bbl through next summer…which again is supportive of the propane trading arb remaining open, especially as foreign entities can play that spread and lock in favorable arbs.
MTB could end September with around 40M/bbls in inventory. We had an historic draw in 2016-2017 of 36.7M/bbls that was export driven…that also took place in one of the warmest winters on record…in my view, MTB has some hub price risks for this winter considering that inventories could be at their lowest end of September levels of the Shale Boom era, exports are robust, the Brent to WTI spread is wide and thus the trading arb is very favorable. A warmer than normal December would dampen this a bit, or mute the severity of price spikes, however, if we would see inventories south of 20M/bbls by the time we get to say mid-January, that could set off some hub fireworks.
Conway and Mt Belvieu are, at present, the primary trading hubs for propane in the United States…and their fundamental outlook could not be any different.
If you deal in Conway values, it would seem you have more downside risks than upside risks. If you deal in MTB values, it looks like there are decent risks to both the upside and downside, pursuant to hub pricing. None of this speaks to potential off-hub price risks (basis, or differential risks) that are determined by local and regional weather conditions and won’t be known until we get into demand season.
These are complicated times and frankly, I think the ‘complicated’ aspects to our supply and demand risks are going to remain challenging for the foreseeable future for our industry; propane is a truly global commodity now and we can no longer just hang our hat on domestic seasonal demand factors to help is predict which way prices will go.
This is where I help my clients the most; looking out into the future, analyzing the myriad of supply and demand risks to price and implementing tailored risk management plans to lock in your profitability, regardless of what the world may do. My contact information is at the bottom of this page; drop me a call or a note and let’s talk about how I can help you successfully and profitably navigate these very choppy waters.
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Earlier this week, I shared an image that showed how the United States was the 2nd largest crude oil producer in the world, having overtaken Saudi Arabia but still trailing Russia. Today, the EIA published an item that says they believe the USA has overtaken Russia for the top spot in the world. My, how times have changed.