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This week’s Trader’s Corner looks at Gulf Coast inventory after last week’s surprise build.
On Wednesday, the U.S. Energy Information Administration (EIA) reported a surprising build in Gulf Coast propane inventory. The market has reacted by taking Belvieu propane prices down. On Tuesday before the report, Belvieu closed at 84.5 cents. As we write, the last deal was at 78.75 cents, with a 77.5-cent deal done earlier.
Seeing prices come off their low indicates some folks are seeing this pullback as an opportunity on the expectation prices will rebound again before winter is done.
Recently we had been saying that a good bout of cold would stop movement out of Midwest markets to traditionally supplied Gulf Coast markets. Our theory was that more demand would reduce the distances that transports would run. We are currently eating our second helping of humble pie.
Most retailers say the cold just wasn’t around long enough to test the theory. They didn’t feel any stress at all from a supply standpoint, with most levels of storage well prepared. Still, we were surprised when the EIA reported that Midwest inventory fell 1.509 million barrels and Gulf Coast inventory increased 0.654 million barrels.
The week of the year reported has averaged a 0.842-million-barrel draw on Gulf Coast inventory over the last five years. That is a 1.5-million-barrel difference between the five-year average and this year for the last week of the year.
When we are getting inventory builds in the heart of winter, you get an inventory picture that looks like the chart below (click to enlarge).
At 36.679 million barrels, Gulf Coast inventory is 12.573 million barrels above the same point last year. That is 52.2 percent above last year and 47.2 percent above the five-year average.
The low inventory point for the last five winters has come during the third week of March, at 17.038 million barrels. To get to that point, inventory would have to decline at an average of 1.9641 million barrels per week.
The five-year average change between the first week of the year and the third week of March has been 8.395 million barrels for an average weekly drop of 0.8395 million barrels. To reach the average inventory position of 17.038 million barrels by week three of March, inventory would have to drop 1.1246 million barrels more than average each week. Suffice it to say, a lot of propane must be used over the next 10 weeks. The reality is inventory is probably going to struggle to get anywhere near the five-year high (of 23.444 million barrels) posted on the third week of March, much less the five-year average.
That high was set last year and was about 2.5 million barrels above the previous high of 20.991 million set in 2009. Unless we get a very dramatic finish to this winter, the bar is going to be set much higher again.
Obviously, with this inventory position, we need to be cautious about buying, especially for product we will use at the end of this winter. As we watched the buying pressure develop on Friday, we wondered what time frame buyers were considering.
We would advise taking positions that could close on the day of our choosing so we could be as flexible as possible.
Uncle Sam was able to avoid the toughest decision of the fiscal cliff, the spending cuts, by kicking them further down the road. Right now, a buyer can ignore the inventory position and trade the short term, but at some point we have got to figure out where to kick a whole bunch of propane. If a lot of it does not end up going through burner tips over the next 10 weeks, it could get very interesting indeed.
Call Cost Management Solutions today at 888-441-3338 for more information about how Client Services can enhance your business, or drop us an email at firstname.lastname@example.org.
WEEK IN REVIEW
Crude managed a slight gain, primarily because of a cutback in crude production by Saudi Arabia and improved Chinese import/export numbers.
Propane was hit hard by a light inventory draw.
We are going into the week neutral. Propane bounced hard enough off its lows on Friday to push us to neutral.
LAST WEEK'S DAILY HIGHLIGHTS
Monday: Moderate weather limited movement in propane. Crude was near flat on concerns about U.S. fourth-quarter corporate earnings. A strengthening dollar also worked against crude.
Tuesday: Propane prices fell as traders considered the high inventory positions. A fall in German imports and exports and forecasts for increased U.S. crude production kept crude neutral.
Wednesday: A below-average draw in U.S. propane inventory that included an increase in Gulf Coast inventory sent propane lower. Crude continued in a flat pricing pattern as traders treaded water ahead of Thursday’s European Central Bank decision on monetary policy and data on China’s import/export activity.
Thursday: Propane tumbled again as traders came to grips with a bearish inventory report. Chinese import/export numbers were up. Reports showed Saudi Arabia cut crude production about 700,000 bpd over the last two months of 2012. Both helped push crude prices.
Friday: Propane prices fell sharply to start the session, but recovered much of the loss by midday. There was a slight drift lower in Belvieu prices in the final hours of trade. Data showing the U.S. trade gap widening, higher inflation in China and a decline in German economic activity for the fourth quarter all worked against crude.