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This week’s Trader’s Corner looks at U.S. propane inventory levels.
This past week, the Energy Information Administration (EIA) reported a lighter-than-average week five inventory draw. The report put downward pressure on propane prices. As the chart below shows, total U.S. propane inventory continues to set five-year highs as it did much of last year. Click the chart to enlarge.
With inventory at this level, there remains downside price risk for this winter. Despite the risks, many propane buyers wonder how much lower propane can go.
Certainly we all know that propane can price under the current 80-cent level. What we don’t know is if it will price much under its relative value to crude. Belvieu is trading at 36 percent of crude and Conway 35 percent of crude.
Below are charts of the propane-to-crude percentage for both hubs. Click to enlarge.
The blue line is last year’s propane percentage of crude. It was setting the new five-year low mark all year. There was resistance to allow Belvieu to go much below 35 percent of crude and Conway to go below 30 percent of crude.
As we discussed last week with the Southern Hills pipeline, there are already efforts to bypass Conway and send barrels directly to the Gulf Coast. One has to wonder about Conway returning to the 25 percent level of last summer.
Taking all of that into consideration, many wonder if 35 percent propane (current value) is about as bad as it can get. Let’s face it, Gulf Coast propane inventory is 60 percent above last year and 70 percent above the five-year average, yet the value of Belvieu propane hasn’t gone below the 35 percent lows established last year.
Then one must consider all of the new propane export capacity on the Gulf Coast and in the Northeast that will be available this year. Unless propane production really keeps ramping up, it looks like the mid-term to longer-term risk of higher propane prices is increased.
The propane inventory surplus is a significant deterrent for propane retailers to take long positions for next winter’s propane supply. Also, there is risk that crude prices could fall if some of the threats to supply in the Middle East and North Africa are resolved or if Cushing crude inventory continues to build.
Propane inventory is high and time is running out to do much about it in the short term. Also, WTI crude looks like it is developing a downtrend because of issues on the Seaway crude pipeline. That means the downside price risk is greatly increased for propane over the short term.
Yet the argument above was the mid-term to longer-term risks are potentially increasing because of more export capacity, higher petrochemical use, as well as the trend to turn propane into propylene.
The conclusion then should be that a short-term pullback in propane prices represents a buying opportunity. However, acting on those assumptions should not be done without factoring in flexible options. All of these assumptions about demand may be wrong, but they shouldn’t be ignored.
The right play is to use a potential short-term pullback to buy for potential mid-term to longer-term gains – but only by using flexible tools that allow positions to be unwound if assumptions are incorrect.
You don’t want to assume a fall in prices like we had coming out of last winter. This is an entirely different ballgame, and we need to game plan with the new “opponent” in mind.
Many of us got in too early on the downtrend last year, putting us in an undesirable position. That scenario might repeat; inventory alone says it should. But be cognizant of the changes that may work against a repeat.
Of course, not taking those positions makes us vulnerable to higher prices.
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 extended its downtrend as traders worried about building crude inventory and that refinery maintenance would further weaken demand.
Propane suffered from much the same fate as high inventory and a below-average drawdown on inventory limited buying.
We go into the week bearish as both crude and propane need to see a significant dent put in inventory to attract buyers. That increases the chances of more downside before the next round of inventory data.
LAST WEEK'S DAILY HIGHLIGHTS
Monday: Crude fell on profit taking after disappointing data on U.S. factory orders. Propane struggled against high inventory and the fading expectation of having enough winter to pull it lower.
Tuesday: Positive economic data from the eurozone helped crude recover part of the losses posted on Monday. Propane also recovered about half of its Monday loss during a volatile day of trade.
Wednesday: A light inventory draw reported by the EIA sent propane prices lower. Crude was little changed despite an inventory build that was slightly below expectations.
Thursday: Propane prices fell sharply on continued fallout from the weak inventory draw reported by the EIA. High inventory and upcoming refinery maintenance work that would reduce crude demand had WTI crude drifting lower. An unfavorable outlook by the European Central Bank on the eurozone economy for the front half of 2013 weighed on traders, as well.
Friday: Propane prices had a strong day to close the week, but still posted a weekly loss. WTI crude fell, extending its downtrend.