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This week’s Trader’s Corner is going to look at the propane supply-and-demand balance.
Everyone in the propane industry knows we are in a time of transition from a supply-and-demand perspective. On the supply side we know that shale gas production in the U.S. has dramatically increased. A breakthrough in technology allowed supplies of natural gas and natural gas liquids to overwhelm demand and the infrastructure needed to transport, process and store them. Over the last few years propane producers, processors and transporters have been working feverishly to catch up to the supply.
On the demand side, there are numerous changes occurring. We all know about the new export facilities. Enterprise is now operating its expanded Gulf Coast export terminal. That facility alone will provide the potential for about 3 to 4 million more barrels per month to be exported. The chart below shows the import/export trends through the end of 2012, before these new facilities came on line.
It should be noted that imports increased last year. As more exports occur, the door is opened for more imports from Canada.
Also on the demand side is the sharp increase in petrochemical demand we recently wrote about. That upward trend continued during February. Petrochemicals were using 533,000 bpd of propane that month. Dow Chemical has just announced it is expanding and adding facilities that will consume more propane. Petrochemicals consumed more than 156 million barrels of propane last year, which was about 20 million bpd more than they were consuming before the recession.
In addition, there are new facilities being built to turn propane into much higher valued propylene, a product in high demand by petrochemicals.
All of this is said to recognize there are a lot of moving parts in the supply-and-demand chain. It is very difficult for propane buyers to know what the supply-and-demand trend is going to be. Some are predicting that the 10 million barrels that current inventory is above the five-year average will be gone by midsummer. The inventory drawdowns of the last four weeks have all been above normal, so the current trends support those projections.
With all the moving parts in the supply chain it is difficult at best to make a projection. Yet, how propane retailers manage their supply will be highly dependent on the inventory trend.
It appears that the best we can do at this point is to keep a close eye on all the moving parts. To that end, we made some changes to our report this week. Each Wednesday, we put out a summary of the weekly EIA data. Our readers get that summary about 30 minutes after the EIA data is released.
This week’s summary was modified to give a better view of all the moving parts of the supply demand balance. Below is the summary our daily readers get each Wednesday. Click to enlarge.
Let’s focus on the bottom section labeled “Propane Supply/Demand." This is the new rearranged section to help everyone keep up with all the moving parts. We’ll go through it to help you get a feel for how the whole supply-and-demand picture looked last week according to the EIA weekly data.
Before we go further, however, let us warn you that these weekly numbers can be different than what the official monthly data may show. That data lags about two months. It will continue to be important to follow the official data to get the true picture. However, the numbers above are how the EIA gets the inventory change it reports. The market will react to those numbers, so they remain very important to our short-term trading strategies. We will continue to report on the official data as it becomes available, which will need to be used to better follow the longer-term trends.
Take a look at the column headings. The first three compare the previous report to the latest report. Column three shows the weekly change. The final three give a picture of where each data point stood on the same week the previous year. It is important to note that we are using the weekly data that was reported during that week last year to give us a good apples-to-apples comparison.
Now, let’s work our way down the rows. We will reference the numbers in the second column, which is the latest data. The numbers are in thousands of barrels per day. Imports were 119,000 bpd. Skip the next two lines, because they are not important to this supply-and-demand discussion. They simply show the breakout of Midwest and East Coast, which are the two primary import areas.
U.S. exports were 135,000 bpd. The net subtracts exports from imports. Import/export activity last week took 16,000 bpd away from domestic supply.
Propane production was 1.254 million bpd. Because net import/exports were negative 16,000 bpd the net U.S. supply was 1.238 million bpd.
Total demand was reported at 1.415 million bpd. Because demand exceeded supply, the draw on inventory is implied at 177,000 bpd. For the week, the change in inventory would be 1.239 million bpd – very close to the 1.241 million bpd reported.
In summary, there are too many moving parts in the supply-demand equation to accurately predict where supplies and prices will be in the future. The next best thing is to keep an eye on all the moving parts and let them help identify a trend that will help us narrow the possibilities down and thus help us make better decisions concerning our short, mid and long-term supply.
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 email@example.com.
WEEK IN REVIEW
Crude was extremely volatile this week. WTI is moving up, while Brent crude is moving down. This difference is partly because of the better economic picture developing in the U.S. Propane continued to get plenty of support from higher than average draws on inventory.
We began last week bearish, but that turned out to be a bad choice as propane continued to be well supported by the inventory numbers. We are still concerned enough that propane is getting overdone to the upside to keep us neutral going into next week.
LAST WEEK'S DAILY HIGHLIGHTS
Monday: The European Union/International Monetary Fund made taxing bank depositor savings a requirement for Cyprus to get bailout money to keep its government running and banks solvent. That news shocked commodities and equities markets, putting downward pressure on crude. However, a speech by the president of oil field services company Schlumberger that drilling activity was slower than it expected in the first quarter was supportive. Belvieu continued to benefit from inventory draws.
Tuesday: Belvieu extended its gains and Conway joined the rally as late winter demand kept buying pressure on. Crude fell on worries about the Eurozone in the midst of the Cyprus fiscal issues.
Wednesday: A 1.241 million barrel draw on propane inventory wasn’t enough to impress traders. Belvieu was unchanged on the day, although Conway gained even as Midwest propane inventory actually had a minute build. Crude remained volatile with the latest headline from the Cyprus fiscal crisis dominating the market.
Thursday: Upward momentum slowed for propane with both hubs falling. Crude fell as investors became more conservative due to the uncertainties in the Eurozone.
Friday: WTI crude kept to its volatile ways with a surge higher to close the week. Positive U.S. economic data reported on Thursday seemed to have a carryover effect. Reports of more production from the North Sea had traders closing WTI/Brent spread plays. After the midweek lull propane was once again adding value. Both hubs posted solid gains.