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MARKET INSIGHTS FROM

LAST WEEK'S TOPIC: PROPANE PRICES

Propane inventory posts largest draw on record

One of the challenges of writing Trader’s Corner is choosing a new subject each week. When the largest propane inventory draw on record occurs, the choice is made for you.

For the week ending Jan. 19, the U.S. Energy Information Administration (EIA) reported an 8.399-million-barrel draw on inventory. The EIA changed what it included in inventory as of January 2015 so our research only goes back to that date. The previous high draw had been 7.188 million barrels for the week ending June 13, 2017.

Some may be thinking about the draw just five weeks ago of more than 9 million barrels. But that draw included about a 6-million-barrel adjustment by the EIA. Chart 1 reflects inventory draws as they should have been reported. The adjustment still had a major impact on the way inventories were looking. Now, the record draw makes inventory positions even tighter.

The good news for buyers is that inventory went from very high to about normal over these past few weeks.

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Inventories were setting five-year highs most of last year, which had propane prices suppressed. Propane has been a cheap Btu compared to other energy sources because of its high inventory position, low domestic demand and robust production. Its value relative to crude was at the lower end of the typical range through much of last year, dropping to around 30 percent. During the spike in Mont Belvieu prices the week before last, the relative value reached 50 percent but has now slipped back to around 47 percent.

Chart 3 shows the current relative valuation is below normal for this time of year and even below where it was at this time last year. The point is that the adjustment in inventories and the record-breaking draw that have occurred over the past five weeks have not caused propane prices to get out of hand. They have pushed valuations back closer to normal, to be sure, but not off the rails.

The record-setting draw on inventory had plenty of contributing factors. Domestic and export demand was up for the week. Domestic demand was up just 130,000 barrels per day (bpd), far less than expected given the cold weather. Meanwhile, exports were up 273,000 bpd. We found that surprising given export economics aren’t favorable. On the supply side, propane imports were down, likely a combination of logistical issues and a need for propane in Canada. But the biggest factor contributing to the draw was a 363,000-bpd drop in U.S. propane production. Keep reading...

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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.