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This week’s Trader’s Corner looks at the sharp rise in propane exports.
There is little secret that U.S. propane production has been increasing. Production has been increasing at a far faster pace than demand in recent years.
The result has been a steady devaluation of propane relative to other energy sources. Propane’s value is currently running between 30 and 40 percent of crude and leaning more consistently to the lower end of that range. Just a few years ago, when a barrel of propane was priced at 75 percent of a barrel of crude, it was considered a good buy.
Demand has been limited by a weak economy, cheap natural gas, less new home construction and mild winters. Unfortunately that has not allowed propane retailers to take full advantage of a great pricing environment. While margins have generally improved, gallons per customer tank have been declining for most dealers.
On the supply side, new technology has allowed the development of unconventional natural gas fields, such as the numerous shale plays. The new production of natural gas and associated natural gas liquids has simply overwhelmed the supply/demand balance. Even if recent winters had been colder, issues would have been with logistics, not overall supply availability. Without much growth in domestic heating load for propane, producers are looking for outlets for their propane production.
There have been a couple of related bright spots for producers. First, there has been resurgence in the U.S. petrochemical industry. Petrochemicals that 10 years ago were leaving the U.S. chasing cheaper feedstock are now finding the best values right here in the U.S. As a result, U.S. petrochemical demand for propane is already above prerecession levels, and the economy is far from robust.
Those same petrochemicals have a high demand for propylene. U.S. refiners have been steadily decreasing fuel grade propane production in favor of propylene. In addition, more dehydrogenation plants are being built to turn low-valued propane into higher-valued propylene.
But even with these developments and reduced imports, U.S. propane inventory is high. As of last week, propane/propylene inventory was 26.3 percent above the five-year average.
As a result, companies have been looking to take advantage of the wide value gap between cheap U.S. propane and much higher global propane prices. The result is a dramatic increase in propane exports. The chart below shows a tremendous surge in propane exports in October, the last official data from the Energy Information Administration (EIA). Click to enlarge.
The red bars showing the monthly exports for this year have been setting new five-year-high marks most months. Exports in October surged to new heights at 5.854 million barrels. At the same time, U.S. imports have been dramatically reduced. Imports into the U.S. Gulf Coast are now the way of the dinosaur, and imports into the Midwest and East Coast are reduced.
As a result, the net import/export (imports minus exports) picture has dramatically changed since 2005. The chart below shows the net import/exports. Click to enlarge.
The U.S. became a net exporter in 2011, and 2012 net exports were greater than the previous year through October.
Beginning in February, the U.S. will have more export capability with the completion of an Enterprise project on the Gulf Coast. Targa is also working on an expansion of its Gulf Coast export facility. There are projects being developed on the East Coast, as well. Don’t look for a change in this trend anytime soon.
It will be interesting to see what impact crude projects designed to take oil from north to south will have on propane exports. The assumption is that these projects will raise U.S. crude prices closer to the global price. Right now, U.S. crude is about $16 below the world market, which helps create the market for propane exports.
No matter what happens with crude, propane is oversupplied in the U.S., so the assumption is that exports will continue. What should happen to crude’s price as a result of these projects? WTI crude will go higher, resulting in propane trading at an even lower percentage of crude until demand for propane from exports, petrochemicals and domestic heating take up the slack.
The unknowns and uncertainty created by the evolution in our industry make the longer-term purchase of supply even more risky. Markets will most assuredly work to balance propane supply and demand. Eventually U.S. propane should start trading at higher relative values to other energy sources as that balance is attained. But, when will that be? Will the new export facilities be enough? Will it take a stronger economy, or will the surge in supply start to taper off?
As long as we are in this transitional period, a propane retailer needs to remain flexible in the way he manages his supply and remain well informed on changes that could affect the supply/demand equation.
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 email@example.com.
WEEK IN REVIEW
The taking of hostages by an Islamic militant group at an Algerian natural gas facility helped push crude in the latter part of the week.
Propane is getting seasonal buying pressure despite a bearish inventory picture.
We go into the week bullish about propane, as there appears to be enough demand to overlook the weak overall fundamental picture.
LAST WEEK'S DAILY HIGHLIGHTS
Monday: Propane prices began to stabilize after moving lower following a bearish inventory report last week. Saudi Arabia assured markets it still targeted $100 Brent crude despite production cutbacks in December. It said the cutbacks were due to lower demand, not an effort to keep prices at the current $110 per barrel for Brent.
Tuesday: Worries about a potential delay in raising the U.S. government’s spending limit and a 0.5 percent decline in Germany’s economic activity in the fourth quarter sent crude lower. Conway propane rebounded after being off on Monday. Warnings that Iran would have enough enriched uranium to produce at least one nuclear bomb by the middle of next year limited the downside for crude.
Wednesday: The EIA reported another build in Gulf Coast propane inventory, sending Belvieu propane prices lower. Conway prices were up 1 percent after another above-average draw on Midwest propane inventory. Late word of Islamic militants raiding an Algerian natural gas facility and taking hostages caused a surge in crude. The EIA data was also supportive for crude, with nearly a million-barrel draw on inventory reported. Expectations were for a 2.3-million-barrel build.
Thursday: Reports of a bad situation developing in Algeria with hostages killed sent crude up 1.3 percent. Belvieu propane surprisingly shook off the bearish inventory data after just one day, moving up 1.6 percent. Conway continued its steady gains.
Friday: Reports of numerous deaths among hostages held by Islamic militants in Algeria as the Algerian military attempted a rescue limited profit taking on Thursday’s rally. Propane prices at both hubs kept moving as short-term demand outweighed a bearish inventory picture for U.S. propane.