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MARKET INSIGHTS FROM |
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THIS WEEK'S TOPIC: PROPANE PRICES |
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Closing propane forward positions |
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In last week’s Trader’s Corner, we discussed the jump in propane prices and expressed concern that, once the current weather passes, the price gains will be given back. The surge in prices continued as the cold front passed across the nation. The rise in prices caused some of our clients to close forward positions.
A forward, commonly known as a swap, is a financial tool used to offset price moves in the physical market, allowing the holder of the forward to have a known cost of supply in a future month. In that respect, it functions very much like a prebuy that a propane retailer would make with his physical supplier. |
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In this Trader’s Corner, we will look at why the clients made this decision, how a forward position is closed and the frustrating aspect of closing a propane forward position.
Chart 1 shows the opportunity that the holder of a forward was given.
Propane prices had been weak. High inventories resulted from robust production and slow demand, especially in the domestic markets, due to the mild winter to date. But inventory positions had recently tightened, propane had remained undervalued, and the cold front essentially jolted the market out of its slumber. As a result, in just seven trading days, Mont Belvieu ETR propane jumped 18.875 cents. Conway rallied 14 cents. Prices continued to surge as of Jan. 19. |
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Now, for the basis of the decision to close: In most cases, a jump in prices would be a reason to hold forward positions. A key reason for taking forwards, doing prebuys or filling storage is to protect against this exact kind of spike in prices. Clients decide to close because the increase in prices is likely not sustainable.
In last week’s Trader’s Corner, we showed Chart 2. |
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It shows that export economics or the arbitrage opportunity to move propane from the U.S. to Asia is becoming less favorable. Demand in Asia is off, so the way to keep exports going will be for U.S. prices to fall. On most days, the U.S. exports more propane than it consumes, so keeping supply and demand balanced is highly dependent on exports.
It also does not look like the current weather support will continue. Chart 3 shows a high probability that most of the nation will experience above-normal temperatures by the end of the month. |
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We also know that the current spike in prices has a lot more to do with disruptions to propane supply at Mont Belvieu than it does with demand. While demand is better, propane inventories are still in good shape for this time of year. But low temperatures wreak havoc on oil and gas production, natural gas liquids fractionation, storage facilities management, crude refining, transportation and just about every other aspect of the energy supply chain. As temperatures warm, operations will get back to normal quickly, taking away much of the reason for the current craziness in propane prices. Keep reading... |
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ABOUT OUR PARTNER |
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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. |
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