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This week’s Trader’s Corner looks at U.S. propane production.
Last week’s Trader’s Corner looked at U.S. propane inventory. After the latest data from the Energy Information Administration (EIA), U.S. propane inventory is 35.2 percent above its five-year average for this time of year. Inventory is just 12.9 percent ahead of last year.
With the end of winter just around the corner, many wonder if propane prices are about to fall off the table with inventory so high. Yet, as we pointed out last week, propane is already trading at historic lows against crude, and there has been strong resistance against allowing propane values to fall much below where they are now relative to crude.
We still think there could be a short-term pullback when everyone finally gives up on winter. If it occurs, we think it could be a good buying opportunity as we look to the mid-term and long-term possibility on propane values.
One could make a strong case for weaker propane prices into next winter if the focus is on current inventory and propane production. Both are very high. Below is a chart on U.S. inventory we looked at last week, updated to reflect last week’s draw on inventory. Click to enlarge.
It is easy to see that inventory, though high, is coming down at a faster rate than it was at this time last year. But that is explained by this year’s winter having 8 percent more heating degree-days than last year. This year’s trend is still very comparable to the five-year average for this time of year.
But what happens with all of the new production when winter is over? Below is a chart that shows how propane production is trending. It only covers through November 2012, which is the last official data. Click to enlarge.
The chart shows the combined output of propane by U.S. natural gas processing plants and refineries. Obviously there have been incredible gains in propane output. Comparing November 2012 to the previous November, production is up 78,000 bpd. Looking at the average daily production through November of 2011 and 2012, the difference is 95,000 bpd – 882,000 bpd in 2011 and 977,000 bpd in 2012.
Depending on whether you want to analyze production based on the year-over-year difference or the latest monthly difference as an ongoing trend, we could project next year’s production at anywhere between 28 to 35 million barrels more than this year.
If that happens and all of that new production gets poured into inventory, propane will be cheaper than dirt. But before you get your shovels, let’s consider other possibilities. First, the upward trend line for production may not carry forward. As the price of the commodity goes lower, the incentive to tap more production is reduced. The current price direction of natural gas, which is sharply down from the year’s high, will shelve some projects. But there is no doubt that any company primarily in the natural gas business is going to chase more natural gas liquids, because that is where their profit is with methane prices so low.
The best reason for this production to bypass inventory – and perhaps reduce current inventory – is the new export capacity we have been discussing. Let’s take the one coming online this month: Enterprise is adding about 4 million barrels per month to its export capacity. That is 48 million barrels more export potential in a year.
Obviously that project alone could more than take up new production this year, assuming it operates at full capacity. But it isn’t the only one to consider. Targa is adding Gulf Coast export capacity, and export terminals have been developed on the East Coast.
We must consider that petrochemicals are likely to consume more propane, even though they are gorging themselves on cheap ethane. There has been a revitalization of the U.S. petrochemical industry since U.S. natural gas prices have plummeted. Those petrochemicals are also thirsty for propylene. Many barrels of propane will be converted to higher-valued propylene this year.
The bottom line is propane has more upside price risk than the current environment would seem to dictate. Until proven otherwise, we probably shouldn’t assume propane to be priced much less than 35 percent of crude. We should monitor inventory conditions closely through the summer to see if all of these infrastructure changes result in an inventory trend line that is different from last year.
We are inclined to take short to mid-term positions that are flexible enough to exit – on any sharp end-of-winter pullback. Then we would look at longer-term positions if the inventory trend line shows infrastructure changes are containing inventory builds.
There are tools, strategies and information sources that can help you succeed in this dynamic environment.
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 neutral for the week, but it had a weak close on Friday. There could be more downside coming there.
Propane was up for the week after a supportive EIA report.
We started the week neutral as much can happen over a holiday weekend. However, crude has downside risk and propane will need weather support or could be weighed down by crude.
LAST WEEK'S DAILY HIGHLIGHTS
Monday: A disruption in the Dixie pipeline east of Hattiesburg due to a tornado caused supply at most terminals to run dry. Flow was restored before the end of the day. WTI crude surged higher, taking out several technical support points. Weak economic conditions in the euro zone had traders favoring WTI over Brent.
Tuesday: Conway recouped its Monday loss and Belvieu extended gains with winter weather in support. Traders continued to buy crude, potentially breaking its downtrend, on hopes an improving global economy will increase demand more than expected.
Wednesday: Crude and propane prices moved lower despite a rather bullish report from the EIA. Propane inventory fell more than average for the sixth week of the year, with a 2.458-million-barrel draw, but traders seemed unimpressed.
Thursday: Propane rallied from Wednesday’s losses as winter weather continued to support. WTI found more buyers despite news that the euro zone is in a recession after its economy contracted for two consecutive quarters.
Friday: Propane prices rebounded from early-morning losses, with buyers stepping up before the three-day holiday weekend. Crude prices tumbled after reports showed U.S. industrial activity slowed in January.