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Midwest propane market better balanced

Hydrocarbon Engineering,

According to the US Energy Information Administration (EIA), higher inventories, milder weather, and falling crude oil and natural gas prices have resulted in a Midwest propane market that so far this winter has not experienced the challenges faced last winter, when the combination of depleted inventories and high wind demand pushed propane prices to record highs prompting emergency measures to address propane supply shortfalls. This winter, Midwest propane markets are well supplied; however, the changes prompted by the events of last winter continue to influence the market.

As of 30 January, Petroleum Administration for Defense District (PADD) 2 (Midwest) propane inventories are 11.8 million bbls above the same time last year and 6.3 million bbls more than the five year average. Propane inventories in the Midwest began building in the summer and by 31 October were 6.3 million bbls higher than the same time in 2013 and 0.7 million bbls higher than the five year average. Inventories have remained high since then because of lower demand during a less severe winter, with Midwest heating degree days so far this winter (October – January) 8.5% below the comparable year ago period.

The preseason inventory builds were supported by higher prices this past summer at the Midwest propane storage hub in Conway, Kansas, compared with prices at Mont Belvieu, Texas, storage hub. Higher Conway prices kept Midwest propane production in the Midwest rather than being sent to other regions increasing inventories.

The higher inventories, less severe winter weather, and falling crude oil and natural gas prices have caused spot propane prices to fall. Spot prices reflect feedstock costs, processing costs, and overall market conditions, including demand and inventory levels. In 2013, 59.3% of propane produced in the US came from processing of natural gas, while 40.7% was from refinery crude oil processing. Because propane is produced from both natural gas and crude oil, the price of propane is related to the prices of both commodities. Since 2012, propane prices have tracked between crude oil and natural gas prices on an energy equivalent basis. Recent falling crude oil prices have significantly narrowed the spread between crude oil and natural gas, and have pushed propane prices lower.

Spot propane prices at Conway and Mont Belvieu averaged US$0.97/gal. and US$0.94/gal., respectively, in October 2014, US$0.14/gal. and US$0.20/gal. less than at the same time in 2013. As crude oil prices began to fall and propane inventories continued to build in both the Midwest and the Gulf Coast (PADD 3), spot propane prices at both hubs fell. By December, Conway and Mont Belvieu propane spot prices averaged US$0.56/gal, respectively. For the week ending 30 January, prices at Conway averaged US$0.45/gal., US$2.06/gal. lower than the same week last year, when supply shortages were most acute.

Although Midwest propane inventories are still quite high, last winter’s propane supply shortages, as well as changes in infrastructure and supply patterns, continue to affect Midwest wholesale and retail propane markets. Before January 2014, the spread between Midwest retail and wholesale prices averaged US$0.65/gal., reflecting traditional propane supply and distribution patterns from supply sources to the wholesaler and then to the propane retailer. However, as propane markets tightened last winter (2013 – 2014) this spread rapidly increased as costs for moving supplies through the supply chain increased. Although propane markets this winter are not experiencing problems, the retail wholesale price spread has not returned to historical levels.

Changes in infrastructure, including the repurposing of the Cochin pipeline, have changed logistical networks for propane markets in the region. Propane supply networks now increasingly rely on relatively more expensive rail and long range truck shipments. Propane wholesalers and retailers have also made changes to secure supplies well in advance of winter and have increased the amount of propane they hold in inventory. Wholesalers and retailers that opted to purchase propane well in advance of this winter likely did so when prices were approximately US$0.50/gal. higher than current prices. Propane retailers also encouraged customers to switch from will call to firm contracts with automatic delivery, which provides greater security of supply but less flexibility on price. These changes in the supply chain have caused the retail-wholesale propane price spread in the Midwest to widen. The spread, which averaged US$0.86/gal. for October, an increase of US$0.22/gal. from 2013, was US$1.32/gal. as of 2 February.

Adapted from a press release by Emma McAleavey.

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