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Trader's Corner
This week’s Trader’s Corner looks at the drop in demand last week that resulted in a surprising inventory build.
One thing is for certain in the world of propane analysis: the lack of certainty. Through August, propane demand was high and inventories were not building.
From week 31 to week 34, propane inventory only built 246,000 barrels, from 61.826 to 62.072 million barrels. The five-year average build during that same span has been 3.833 million barrels.
If anything, as we have already discussed in Trader’s Corner previously, the prospects were for the inventory situation to get even worse. Crop-drying demand is expected to be strong; more export capacity is coming on line; and forecasts are for a good winter heat load.
Then suddenly last week, demand fell off the table and inventories built much more than normal for week 35 of the year. The Energy Information Administration (EIA) reported U.S. inventory increased 2.542 million barrels in week 35 of the year. The average build for that week over the last five years has been 0.648 million barrels.
In the chart above (click to enlarge), the red line shows propane demand for this year. We can see that prior to last week demand had run well above average for eight of the last nine weeks and was right at average in the week that was not above average. In fact, new five-year highs for demand were set in three of those nine weeks.
You look at those weeks and you “get” it. As we looked at last week, petrochemical demand is high. In previous weeks, we showed exports are setting records and imports are low. You see these trends and you understand why new five-year highs for demand are being set. You understand why the fundamentals are keeping inventory from building. You understand why propane prices are going higher in response.
Then suddenly propane demand falls off the table and you don’t understand. It is the equivalent of the fight you had in high school where you became convinced the guy you were fighting had three arms. The roundhouse punch that hit you squarely in the right temple certainly didn’t come from either of the two fists that you could plainly see in front of you.
Sometimes it is hard to know from where these licks come.
Did exports stop? No. Did petrochemicals go in the tank? No. Did the EIA make a mistake? Maybe. Was it the effect of short-term demand from the recently opened Dixie Pipeline that we had concerned ourselves with in recent reports suddenly playing out? Maybe.
Traders certainly reacted swiftly to the surprise. Sellers that had been in the driver’s seat for weeks were suddenly eager sellers. Belvieu had closed at 119 cents and Conway 117.25 on Wednesday. By Friday, Belvieu had been down as low as 109 cents and Conway 107 cents.
The swift reaction tells you a lot of folks were saying, “What just happened? I don’t get it.” But the fact is propane had moved up rapidly. During August alone, Belvieu was up 21.625 cents or 22.6 percent and Conway was up 21.8 cents or 23.6 percent. It had been the lack of inventory builds that had driven propane up so rapidly, so it was not a surprise that the surprise build sent prices sharply lower.
We have been showing the above chart nearly every week, but it truly is the propane price story. As we have said, it is not the inventory level that has been driving prices; it is still above average. It has all been about the inventory trend. Now one week does not constitute a trend. The drop in demand could be an anomaly. And, of course, there will be more new factors affecting the inventory trend.
As we discuss with our clients all of the time, we can only trade what the market is giving us or telling us at any given moment. Just like we couldn’t ignore the flat inventory trend that developed for four weeks, we can’t ignore the build this week.
It is this kind of volatility that has made the use of financial hedging tools such an essential part of a propane retailer’s supply risk management arsenal. These tools allow the type of flexibility to move in and out of supply positions as conditions change. We are seeing more and more propane retailers that are actively managing supply side risk by moving in and out of supply positions as conditions warrant.
The market doesn’t fight fair. If it can hit us in the side of the head with a mystery punch, it will. Don’t go into the fight without all of the defensive measures available.
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
Propane inventories had a surprisingly large build, sending prices down sharply and into negative numbers for the week. Prospects of the United States launching a military strike against Syria pushed crude to a new closing high for the year. We go into the week neutral despite two days of losses in propane. Propane finished well off session lows on Friday, which moved us to neutral.
LAST WEEK'S DAILY HIGHLIGHTS
Monday: Labor Day.
Tuesday: Propane got off to a fast start to begin the new month with solid gains at both hubs. Prices remained well supported by the lack of inventory builds. Crude had a volatile day, trading between $104.21 and $108.83 on whatever was the latest view on potential U.S. attacks on Syria.
Wednesday: Finally a little slowdown in the run in propane prices. It looked as if traders might be getting word of a more bearish inventory report. West Texas Intermediate remained in its downtrend as traders became less convinced the United States would actually conduct a military strike against Syria.
Thursday: Propane prices fell sharply after the EIA reported a surprising 2.542-million-barrel build in propane inventory. Crude rebounded on word the U.S. Senate Committee on Foreign Relations had approved limited military action in Syria.
Friday: After initially opening sharply lower, propane prices were beginning to firm up by the close. It looked as if some buyers might be stepping back in on the dip. Meanwhile, crude was on a major run after the government told U.S. citizens to leave countries neighboring Syria. |
