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MARKET INSIGHTS FROM

LAST WEEK'S TOPIC: WINTER DEMAND

Propane prices turn lower

On Sept. 1, Mont Belvieu ETR propane closed at 72.5 cents and Conway at 70.5 cents.

Chart 1 shows the trend in propane and crude closing prices leading up to and including that day. You can see that both are in a sharp uptrend. That day, we wrote a Trader’s Corner titled “The Latest Factors Impacting Propane Demand,” released on Sept. 5 (delayed a day because of Labor Day).

Below are excerpts from what we wrote on Sept. 1:

We have been adamant that the prices of propane and crude would rally from the lows early this year, and they have. Propane has gone from lows of 53.875 cents at Mont Belvieu to 72 cents, Conway from 52 cents to 70.5 cents per gallon and crude from $66.74 to $84.74 per barrel. But we now must wonder how much runway is left for propane prices to climb.

We do think propane prices will get support from higher crude. Crude fundamentals are a lot more supportive of its price than propane fundamentals are for propane’s price. But beyond the support from higher crude prices, we think that weather conditions this winter are likely to hurt domestic propane demand and keep it below normal. It may be a bridge too far to expect economic conditions to improve enough to offset the weaker domestic demand with stronger export demand.

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Some buyers took advantage of the opportunity that low propane and crude prices offered them early this year. But the rally in prices is adding risk to any type of speculative position for this winter. Hedges, where the retailer is locking down the supply cost and making a corresponding sale to the consumer, are almost always a good thing. But be aware that speculative positions, where a supply price is committed to without a corresponding sale, have increased risk – not only because of the rally in propane’s price to this point but also due to the uncertainty about propane’s supply/demand balance this winter.

Chart 2 is the same closing price chart for Sept. 21, the day before we are writing this current Trader’s Corner.

After our expression of doubt that propane prices would continue to climb, they did until Sept. 14 when the rally started topping out at 78.875 cents for MB ETR and 78 cents for Conway. Since then, prices have retraced the gains and now stand below where they were when we wrote the Trader’s Corner on Sept. 1.

In last week’s Trader’s Corner, we listed six reasons why propane prices could remain under pressure for much of this winter. Regular readers will recall several Trader’s Corners in early summer discussing the unusually low domestic demand for propane. Our theory was that inflation had hurt consumers, putting household budgets under stress. Food and gasoline were taking much larger-than-normal chunks out of household budgets. Our theory was that consumers were holding lower levels in their propane tanks as they tried to pinch pennies. If true, we warned that pent-up demand could tighten the supply/demand balance for this winter. Keep reading...

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COST MANAGEMENT SOLUTIONS

Cost Management Solutions LLC (CMS) is a firm dedicated to the unbiased analysis of the energy markets for the propane industry.

Mark Rachal, Director of Research and Publications at CMS, regularly provides insightful looks into various facets of the marketplace.