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This week’s Trader’s Corner looks at 2012 propane prices.
On Thursday morning of last week, Belvieu propane dropped sharply, closing the differential with Conway to just 3.5 cents. That prompted us to do a price and inventory analysis of this year, comparing the two hubs. When the spread between the hubs is less than 7 cents, we believe that is significant.
With our analysis, we were warning our daily readers and clients to beware of possible downward pressure on Conway prices if Belvieu prices did not rebound. However, traders stole our thunder. Between the time we wrote the piece (some of which we will share below) early in the morning and the time we sent out our daily evening report, Conway dropped 5 cents.
We would have rather the drop happened the next day, as our readers would have been even surer how prophetic we can be, but they – like you – will have to take us at our word that the article was written before the drop in the Conway price.
First, let’s discuss why the drop to less than the 7-cent spread prompted us to write the article. Midwest supply is greater than its demand and storage capability. We saw all summer the result of that problem, as Conway prices traded at a steep discount to Belvieu to allow barrels to move into areas traditionally supplied by Gulf Coast production. Once the spread is less than 7 cents, most of the arbitrage advantage is gone for Conway. At that level, pipeline tariffs, rail costs and certainly trucking rates negate the Conway price advantage.
If the spread is less than 7 cents, retail marketers, for the most part, are going to purchase product at their traditional locations and the advantage of moving product from the Midwest to Belvieu storage is gone.
Assuming that barrels moving from the Midwest to the Gulf Coast is a key reason that the Midwest propane surplus was reduced more this summer than Gulf Coast surpluses, one concludes that Midwest demand will have to rise significantly to soak up all of the product staying at home once the spread is less than 7 cents.
If demand is not enough and storage is lacking for supplies, the only option is to increase the reach of the product. To increase the reach of the product, the price must fall – the logic in our warning to daily readers to beware of a potential drop in Conway prices.
Of course, markets don’t always react immediately to the situation like they did on Thursday. The possibility for Conway prices to stay within 7 cents or even higher than Belvieu for a period of time is possible. In fact, the spread was back to just 5.25 cents by the close on Friday. But in our view, Conway can’t stay priced at or above Belvieu for long.
Over the long term, producers are looking to bypass Conway all together and get more barrels directly to the Gulf Coast, where they at least have the hopes that growing petrochemical demand and exports will give them a better price. But, until the infrastructure is in place, Conway almost has to be priced less – and sometimes significantly less – than Belvieu to push Midwest production deeper into higher-consuming areas, unless strong winter demand is in play in the Midwest.
When we did the analysis for our readers, we wanted to show pricing for this year, because Belvieu was trading near the year’s low. Below is a chart and table on the prices for the two hubs this year to help aid in the discussion that follows:
Looking at this year’s pricing history, we see that Belvieu propane is now trading near the year’s 71.5-cent low of June 1, with the current price at 74.375 cents. Prices recovered from that June first low through October as inventory surpluses began to decrease relative to the five-year average.
With inventory not coming down much as this winter progresses, it appears traders are beginning to anticipate an even higher inventory surplus coming out of this winter. That has caused the rapid decline from the recent high of 99 cents over the last five weeks. It is worth noting that Gulf Coast inventory is currently 29 percent above the five-year average, yet it is being priced near where it was when inventory was at 41 percent above the five-year average.
Conway hit a low of 51 cents on June 25 when Midwest inventory was at 37 percent above the five-year average. Midwest inventory surpluses have been drawn down largely at the expense of Gulf Coast inventory by Midwest propane moving over the summer into markets traditionally supplied from Gulf Coast production. With Midwest inventory currently only 7 percent above its five-year average, Conway is priced nearly 20 cents above its June 25 price.
In looking at this analysis, we would conclude that for now Belvieu is potentially oversold against its fundamentals when compared to Conway. We believe that increases downside risk to Conway and increases upside price risk for Belvieu. But as we said in a phone conversation with a client on Friday, there has to be winter demand to test anyone’s theory on supply and prices. Until there is demand, it remains only theory and is of little value.
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 prices fell as worries about demand destruction for crude outweighed concerns about supply threats.
Propane remained a sharply lower price trend, with high inventory and low demand creating weak fundamentals.
We go into the week bearish, with crude breaking below its price channel and propane needing weather to turn.
LAST WEEK'S DAILY HIGHLIGHTS
Monday: A gain in Chinese manufacturing was enough to offset weaker U.S. manufacturing and keep WTI in positive numbers for the day. Conway followed crude, while Belvieu stayed flat to Friday’s close.
Tuesday: Propane fell sharply at both hubs as a lack of winter demand kept propane prices in a downward price channel. A lack of progress on the U.S. government budget talks pushed crude lower.
Wednesday: The EIA reported only a small draw in U.S. propane inventory, causing Belvieu propane to drop dramatically. Belvieu fell 5 percent and Conway 1.9 percent on the fundamental weakness. Crude could not use positive data on the U.S. services sector to extend its gains from Tuesday. Investors seemed more interested in equities than crude.
Thursday: It was Conway’s turn to give up a huge chunk of its value, with a 5.5 percent drop. Milder temperatures in higher-consuming areas and high inventory have caused a drop of around 25 cents in propane over the last five weeks. A dim outlook on the euro zone economy for 2013 by the European Central Bank sent crude lower.
Friday: The downward pricing pressure on propane slowed considerably, but it remained a buyer’s market. Crude remained out of favor as a better-than-expected jobs report for November saw money flow to equities over crude.