First, let’s take care of business with this week’s inventory report…pay close attention near the end of it related to exports.
Propane inventories experienced a more modest build this week, up just 1.3 million for a current total of 82 million, as reported by the Energy Information Administration as of 6/19/15. Inventory is still above average at 28.3 million above 2014’s inventory level at this time and 23.8 million above the 5-year average of 58.2 million.
Regional Inventories: Midwest up 600,000 to 22.2 million; Gulf up 800,000 to 52 million; East flat at 5 million; and West flat at 2.8 million.
Historical Averages: Midwest is still 5 million above last year’s inventory level and is 2.4 million above the 5-year average of 19.8 million. Gulf Coast inventory is 22.5 million above last year and 21.8 million above the 5-year average of 30.2 million. East Coast is up 900,000 from last year and is up 600,000 from the 5-year average of 4.4 million.
Propane imports were down 18,000 to 83,000 bpd. East Coast up 2,000 to 27,000; Midwest down 20,000 to 46,000; Gulf was flat at zero bpd and West up 1,000 to 11,000. Propane exports increased 151,000 to 600,000 bpd.
Other Inventory Numbers:
Crude Down: -4.6 mm to 1,156.3
Motor Gas Up: +0.7 mm to 218.5
Distillates Up: +1.8 mm to 135.4
Did you see it? Propane exports increased 151,000 to 600,000/bpd, or 4.2M barrels for the week. In case you are curious, that is one of the largest weekly export amounts for propane in history. The export numbers will be the biggest thing I will be watching these next few weeks. Perhaps this week’s report was a glitch or an accounting error, or due to some technicality of barrels being offshore or something silly and not connected to fundamentals.
Then again, it could be connected to the fundamentals of export capacity and if it is, that would not be a surprise to those of you who have been following this blog for the past few months, as we wrote about this possibility back in April in ‘The Case for Propane Price Concerns’, linked here.
That item came about after I had seen projections for increased propane export capacity that were set to kick in right about this time. Here was the graph I shared back in April (courtesy of BP & used with permission); I added the black triangle for a reference or inflection point for when we could see exports kicking in:
This chart compared to this week’s data makes BP’s data very prescient, does it not?
Again, we will need to see these export numbers verify in the coming weeks and throughout July. If they do, then my thoughts as to the downside of propane change a bit, certainly for next year. Crude oil is still going to be the big driver of propane unless and until propane fundamentals begin to clean up a bit. I still think we should have some stability in pricing the rest of the summer as we have a lot of propane, but this week’s propane stock build was smaller than expected and there is more export capacity coming online this summer. You can also see from that chart that more capacity will be coming online over the course of the next several months, doubling again one year from now.
As long as the export arb stays open (along with possible petchem consumption), that’s how excess propane supplies disappear and balance is brought back into the picture…however you know as well as I do this industry rarely hangs out in ‘balanced’ territory.
I will leave you with one final thought as it relates to pricing and directions and this has to do with propane storage. Companies such as ours lease propane storage. There is a finite amount of storage that can be leased. Once you hit that mark, there is no more. Several traders believe we could get to that point this summer. I won’t say we will or won’t but let me tell you what happens if we do; pricing for the fall and winter continue to rise, as has been the case this week.
When there is no more storage to lease, in-month (meaning gas right now) barrels have no where to go and those prices can become very distressed. It also means companies like ours, Plains, etc, companies who sell prebuy contracts for the fall and winter, we will be looking to buy those outmonths in the fall and winter. When that happens, and the sellers know why the buyers are looking for them, the price of poker goes up and the gap between the current barrels and outmonth barrels widens further (goes into greater Contango, which is a market where the futures price is higher than what the expected future spot price will be).
At that point, it becomes a gambler’s bargain…are you willing to bet that by the time we get to the demand months the then ‘in-month’ market will take over and kick the Contango farther down the road? Or will prices in the fall remain as strong as they were when people were in buying those contracts? Do you have to establish some kind of fall or winter budget or flat price program to your home heating customers? If so, do you ‘back to back’ purchases with what you sell or do you let it ride? Letting it ride is a dicey proposition.
There is a roughly $.1700 cent difference between current month Conway and 4th quarter Conway, $.2000 cents to the 1st quarter. In Mt. Belvieu, that cap is $.1300 & $.1600.
Even in a year where the market is awash in propane, the decisions are not open and shut. The downside seems less risky than the upside and I still believe looking to step in and make purchases for the winter of 2016-2017 would be prudent on some level.
More than anything here, I would say don’t go to sleep on this winter. Don’t be lulled into a false sense of security that the sailing will be smooth and without any risk of turbulence. These export numbers could be a blip on the radar or they could be a harbinger of things to come for this industry.
Remember what I have written several times and will write several more times in the future; this industry corrects violently and extremely. We’re not yet 18 months removed from the highest prices in propane history and we’re now at decadal lows. Record high prices begat record high production which begat record high inventories.
Now we try our best to figure out WHEN the pendulum will break back the other way…because it most assuredly will and no one ever guesses when that begins, they only realize it has happened when they are knee-deep.