MARINER EAST 2: One year ago about this time, we were all hearing that the Mariner East 2 (ME2) pipeline, another line connecting the Marcellus Shale production with export markets in the Philly area, would be coming online in 3Q or 4Q….it didn’t happen, and thankfully so, as the Ohio Valley and Northeast needed all the extra propane in the fall and winter they could get.
I’m now hearing similar time lines for this year, and I think folks are taking it more seriously this time. Demand in the Ohio Valley and Marcellus has been very strong this month, with the cold weather, and propane values are firming up relative to where we began the month. IF…and this is a huge IF….IF ME2 does come online this summer, pricing in the region, and possibly even in Western Ohio and Eastern Indiana, could firm up.
This part of the country (Ohio & PA) has been an oversupplied propane market for the better part of two years. We could see things flip the other way, if some are to be believed, once ME2 gets rolling in earnest.
SAUDI’S PARTYING LIKE IT’S 2008: That’s the headline from this Bloomberg.com article. From the item:
Is this really 2018? It started to sound a lot like 2008 in Saudi Arabia on Friday, as the kingdom’s oil minister argued that the world could tolerate a higher crude price. “I haven’t seen any impact on demand with current prices,” Khalid Al-Falih told reporters at the meeting of OPEC and non-OPEC producers in Jeddah. Arguing that the energy intensity of global economic growth hadn’t declined, he offered the view that “there is the capacity for higher prices.
President Trump certainly didn’t appreciate the sentiment, firing off a tweet that accused OPEC of promoting “artificially high prices” which “will not be accepted.”
Yet setting aside Trump’s unique approach to geopolitics, the Saudi comments are indeed troubling. They are an eerie echo of comments made almost exactly a decade earlier by a former OPEC grandee: Libya’s Shukri Ghanem. The world economy “has not reached the tipping point where it can’t accept higher prices,” Ghanem said back in April 2008.
There’s a lot more to that article and it’s worth a read, and while the past is not always prologue, it never hurts to crack open the history book.
he Hedge funds are very, very long on their crude positions right now, so they are bulled up to near record levels. On the other hand, some crude traders I follow are wondering if the market isn’t ripe for a pullback. Technicals will not be able to accurately account for geopolitical risks, so keep that in mind. Here is one crude trader I follow who has a very good track record, and what she’s watching:
This paragraph from the Bloomberg article is perhaps the big takeaway:
When OPEC met in May, oil ministers were talking quite casually about $50 a barrel as a good price for crude. By the time of the December meeting, several were suggesting that a “fair” price for oil was $70 a barrel and at least one put it higher. Now that OPEC’s basket of crude has reached that $70 level, the target appears to have mysteriously moved upwards again. This is mission creep, OPEC-style.
Speaking of history, the dictates of crude oil prices typically impact the trajectory of propane prices. I began wholesaling propane in 1996, and this relationship has been very, very, very common during all of my years in the industry. There have been times when propane has detached from crude oil (I wrote about that last September) and we do see instances where one side of the other can dip into extremes.
But right now, we see the propane to crude ratio in a channel that fits into historic levels, even though Conway prices are at the lower end of that channel. I put together a graphic of the propane to crude ratio from the past year, overlaid with the path of daily average propane prices at the hubs over the past year. The solid lines indicate propane’s percentage to crude and you will use the vertical axis on the left to track that percentage. The dashed lines indicate the daily average price for propane, and you will use the vertical axis on the right to track that percentage:
You can see that on year ago this time, the propane to crude relationship was in the high 40 percentile range at Conway, and low 50 percentile range at Mt Belvieu. Note the July 3rd time frame on the chart, and you see that propane prices really began to make a run, while crude oil prices did not make a similar run…the propane to crude relationship was off and running and and reached into the 70 percentile range in early 4Q2017 and stayed there through the end of 2017. Then at the start of 2018, we began to pull back down into historic ranges, as propane values began to drop.
You can see that in March of 2018, propane prices had fallen a great deal and the propane to crude relationship at Conway was down in the low 40 percentile range, which is lower than the historic low end of the channel. However, crude has begun to make a run in recent weeks…a strong run…and while Conway’s percentage to crude is down around 43% right now and Mt Belvieu is in the low 50’s, propane prices are moving higher because crude is moving higher.
One could argue that propane prices have some upside risk in them based on the historic propane to crude ratio coming back in line, more so at Conway than Belvieu, but it’s dangerous to make assumptions based on the past.
Still, it would be folly to not pay close attention to the whims and drivers in the crude oil industry, if you are in the propane industry…as crude oil moves larger needles around the world than propane, and propane comes along for the ride (up or down) more often than not.
I still expect robust propane production this summer, because United States rig counts are at their highest levels in three years, according to Baker Hughes.
If I remove the geopolitical costs baked in to the price of crude right now, which I think is a good $5/bbl at a minimum, we’d likely see propane prices lower than where they are and back near levels we saw in March. However, we don’t get to parse such things out of the price and these geopolitical risks are with us for at least a few more weeks.
Crude is off nearly $1.00/bbl to begin today.
WEATHER: The ‘Spring Thaw’ is slow in coming this year…and the two major forecasting models are at odds over how soon the warm will come and stay. The following images are courtesy of BAMWx.com, and the image on the left is the European Model through May 7th, where the image on the right is the American Model for the same period.
Take a look at long-range (next month) this video from Michael Clark of BAMWX.com, shared with permission. For those of you who have agricultural dependent aspects to your businesses, it’s eight minutes well spent…Clark also talks about his expectations for summer temps, too.