There are times in the court of law where a lawyer takes a case knowing the odds are stacked against him or her, but they do it anyway. Sometimes they need the money, sometimes the court appoints them and sometimes they just want a challenge and believe everyone deserves a shot at justice.
I will state up front that laying out a case for bullishness in the propane world right now is one met with skepticism. I will also add I am not saying the following WILL come to fruition…but I intend to lay out some factors that would be the likely ignition points were propane prices and inventories to move in bullish directions. At the least, I think some of the following will serve as guide posts to look out for this summer.
Let’s begin with the amount of LPG export capacity that is or soon will be coming on-line in Mt Belvieu. The following graph is being used with permission from BP:
The triangle represents an increase in export capacity from January 2015 to July 2015. You can also see the projects that are slated to come online later this year and into next year. One year from now, we will be at double where we will be in July…and come July (three months from now) we will have nearly doubled our takeaway capacity from where it was just one year ago. When you look at the takeaway capacity for one year from now, you can see one of the reasons I am confidently recommending people lock in product for 4Q2016.
In my opinion, that’s insane and an ENORMOUS factor for our industry. We saw the impact of propane exports on our industry two summers ago (2013) when inventories were slow to build as exports reared their head in full force in this industry for (by and large) the first time in a big way.
The Arb (click here for a definition of Trading Arbitrage) wasn’t open for much of last year between American and foreign propane markets, having really closed around December 2013 due to rising domestic propane prices. Last summer, propane prices were above $1.00 so The Arb was not favorable for exports and the Pet Chems weren’t cracking all that much propane for the same economic reasons. Producers were also pushing out as much propane as they could because the profit netbacks were so strong and we saw more propane supply come on the market from various shale plays.
Two years ago, the ingredients were there for propane to leave the country via export as well as a favorable environment for decent Pet Chem consumption, which led to inventory levels that were historically low and therefore propane prices hit historic highs (spiked by a large grain drying season and a cold winter). One year ago, those financial factors were not in play and inventories grew to record highs, crude oil also experienced a historic drop and propane prices fell along with it.
Now, to this coming year.
Crude oil is trying to find direction. We’ve seen a $5/bbl runup this week that has dragged propane prices along with it, despite bearish fundamentals for both products. As I shared in this week’s propane inventory report, propane inventories remain at robust levels:
Historical Averages: Midwest is 7.9 million above last year’s inventory level and is up 3.8 million from the 5-year average of 13 million. Gulf Coast inventory is 22.6 million above last year and 15.1 million above the 5-year average of 23.8 million. East Coast is up 100,000 from last year and is even with the 5-year average of 2.0 million.
I believe The Arb has a chance to stay open this summer and in turn see exports continue to fly out of the country, as Western Canada is awash in propane that will be directed towards Conway, KS. As much of that product that can be pumped south will make its way to the Gulf and leave the country via waterborne export. You’ll also see the majority of the propane being produced in the Marcellus-Utica shale play region leaving the area via rail or pipe. That product makes its way to the Northeast where some of it can leave at Marcus Hook, but most of it stored for winter demand.
As I shared earlier this week, I had one of my first bullish propane conversations in months while down at the Southeastern Convention. This person works on the production side of things and is the one who pointed me to flash my light in the direction I am looking today. I was able to find the BP graph that was a perfect illustration of what this person was talking alluding to.
Their ‘concern’ is something I know has been discussed at the NPGA meetings in February as well as a few other seminars in recent weeks around the nation. Those concerns center around what I just outlined, as it is THE wildcard scenario in the current supply glut market we are experiencing.
There are some folks who are genuinely concerned for where prices and inventories could be come January of 2016, just eight and a half months from now.
A lot has to happen between now and then for those concerns to manifest themselves in to reality:
-Arb stays open, exports leave the country at record levels. Capacity is there.
-Pet Chems chew up more product
-Cold first half to winter
Those would be the three biggest factors I see at this point. The netbacks for propane production right now are not great and nowhere near where they were one year ago. You’re not going to see any more propane production take place that doesn’t have to take place. The environment seems strong for exporting at new record levels. How will that affect propane inventory builds?
I don’t want to go all chicken little here. This is one scenario or angle to look at and it happens to be one of the few bullish scenarios that exist and you almost have to go looking for it.
But if you’ve been in this industry for any longer than two years, you understand how violent the corrections can be; when the pendulum swings to one extreme, it typically seems to swing back the other way just as violently before long, spending very little time in the peaceful middle.
COMING MONDAY: Our first serious look at some long-range weather factors and even some early projections.