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Trader's Corner
This week’s Trader’s Corner looks at Gulf Coast propane inventory and shows how recent inventory draws can be a bit deceiving.
Propane inventory has been falling in the last few weeks, and that has allowed propane prices to finally find a floor and start a rebound. Lack of winter and inventory builds had caused prices to fall hard during November and December after peaking in October.
On Dec. 10, Belvieu traded at a daily average of 72.625 cents, down 27.875 cents from its 100.5-cent daily high on Oct. 29. Since Dec. 10, Belvieu has been in recovery mode. From Dec. 11 to Dec. 20, Belvieu gained 10.125 cents.
Because Belvieu had lost so much value over six weeks, it took very little to attract buyers. Even the smallest bullish news could make a big difference with so many interested in propane because of its low price and its relatively low value to crude. On Dec. 10, Belvieu was trading at a historic low for this time of year – at 36 percent of WTI crude.
The reason to buy came when inventory draws on the Gulf Coast finally started to occur. The chart below shows Gulf Coast inventory.
For a while it looked as if Gulf Coast inventory was going to continue to build through the winter. But, over the last three weeks, inventory started to decline. Those declines were plenty of excuse to buy attractively priced propane. In addition, weather forecasts in recent days have suggested that draws on inventory would continue in the coming weeks.
It is easy to question a rally of more than 10 cents on a few inventory draws when Gulf Coast inventory is 29.1 percent above its five-year average and a whopping 48.8 percent above last year at this point. Before we get too cynical about the rally, we must put the current price into context. Below is a chart showing propane’s relative value to crude.
The chart compares propane’s value to crude’s value on a simple percentage basis. The red line is this year’s propane-to-crude percentage. At 36 percent, the relative value is unprecedented for this time of year. At this relative value, a little winter resulting in a few inventory draws goes a long way toward encouraging buyers.
The relative low value of propane, the cold weather, the inventory draws are all good reasons to buy. Purchases here should look good for a little while, but for just how long? Let’s look at another chart and see how it may change perspective down the road.
In the first chart that we presented showing inventory positions, it is easy to see the drop in inventory and thus easy to get a little bulled up about propane prices. But this chart illustrates more clearly that while inventory has been going down it has been going down at a below-average pace. Over the last four weeks, inventory is actually at a higher percentage of the five-year average.
This tells us that the cold weather better be the real deal if longer-term propane purchases made here are to turn out okay. There will be a point sometime in the first quarter of next year, probably when the first break in the cold weather occurs, that the focus will shift back from the inventory draws to the inventory position. If the trend in the chart above does not change through this cold spell, inventory is sure to be at record high levels.
When traders start to put this winter behind them and they look at where inventory is going to start the summer-build period, their perspective could be quite bearish if inventory draws don’t pick up substantially in the coming weeks.
Last week we made an argument for using call options to manage the risk of winter demand driving cheap propane up quickly during January and February. However, if you are going to take a long position by buying a swap for the potential of capturing more of the upside during this cold weather, don’t get greedy and hang on too long. The fortunes of a long position could change considerably in the waning weeks of winter.
Obviously the fate of inventory will be important as we go forward. In our daily reporting service, we send out a summary and analysis of the EIA inventory data every Wednesday, within 30 minutes of its release. That is usually followed up with more in-depth analysis in our evening report in the following days.
Please consider looking at our daily reporting service. We are confident that just having the inventory summary so quickly after the EIA release is worth the cost of the subscription.
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 info@propanecost.com.
WEEK IN REVIEW
Crude continued to trade around the latest headline on the federal budget negotiations, gaining in the front half of the week and dropping sharply on Friday.
Propane is in a strong uptrend, with weather and inventory draws supporting.
We will remain bullish to start this week, with Belvieu showing plenty of strength on Friday despite the pullback in crude.
LAST WEEK'S DAILY HIGHLIGHTS
Monday: The pace of the rebound in propane prices picked up as weather and inventory data provided support. Crude was up on optimism about a federal budget agreement being reached.
Tuesday: The uptrend in propane prices continued at a brisk pace, though with slightly lower gains than on Monday. Buoyed by progress on the budget talks in Washington, investors continued to add risk to their portfolios, benefiting commodities and equities prices.
Wednesday: Propane prices surged after the EIA reported a nearly 2-million-barrel draw in U.S. propane inventory. More than half of the draw was on Midwest inventory, causing Conway to lead the rally. Uncertainty concerning leadership in Iraq after the stroke of President Talabani and continued defiance by Iran concerning its nuclear work pushed crude.
Thursday: A sudden and unexpected negative turn in the U.S. federal government budget negotiations limited the upside for crude. That did little to curtail the rally in propane, as weather and speculative buying helped to push prices up again.
Friday: The failure of a U.S. House of Representatives bill to make it to the floor for a vote due to Republicans opposing the tax increases in the bill set the budget negotiations back considerably. Commodities and equities prices tumbled in wake of the news. Belvieu propane traders shrugged off the news and kept that Belvieu rally going.
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