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This week’s Trader’s Corner looks at the price spread between Belvieu and Conway propane.
We all know the two major propane trading hubs in the U.S. are Mont Belvieu, Texas, and Conway, Kan. We also remember a large price difference between the two developed last year, when Conway was steeply discounted to Belvieu. Traditionally we have seen the inventory positions at the two hubs be the driving force of the price relationship between them.
Because inventory positions have historically been the key determinant in the price spread, let’s begin by looking at the current position of Midwest and Gulf Coast propane inventory before looking at the price relationship between the two locations.
We begin with the Midwest. We pointed out to our daily readers last week that Midwest propane inventory has fallen below its five-year average. At 10.312 million barrels, it is 7.3 percent below the five-year average and 35.3 percent below last year. Click to enlarge the chart above.
Now we will be frank and tell you this inventory position surprises us. We thought when winter hit that propane lifting would become region specific, causing much of the propane that was moving from the Midwest to the South to stop. We fully expected that Midwest inventory would fall at a below-average pace and Gulf Coast inventory at an above-average pace once winter demand started. The result would be a balancing of Midwest and Gulf Coast inventory levels. However, as the chart below shows, we could not have been more wrong. Click to enlarge.
Through the winter, Gulf Coast inventory actually declined at a less-than-average pace. The inventory surplus that was present at the beginning of winter not only didn’t decline, it actually grew relative to its five-year average. Gulf Coast inventory is 73.7 percent above its five-year average and 34.2 percent above last year.
The fallacy in our assumptions was to underestimate the industry’s ability to make infrastructure changes to address imbalances in the supply/demand. We also think impacts of new liquids production in what has traditionally been Gulf Coast-supplied markets was greater than we expected.
With this background on inventories, let’s now turn our attention to the focus of this article, which is what the inventory positions have done to the relative price between Conway and Belvieu.
The chart above shows the price spread or relative price, if you prefer, between Belvieu and Conway. Click to enlarge. When the price is above zero, it means that Belvieu propane is priced higher than Conway propane.
Hopefully all of you just scrolled back up and reread that Midwest propane inventory is 7.3 percent below its five-year average, while Gulf Coast inventory is 73.7 percent above its five-year average. Why then, one might ask, is Belvieu propane priced higher than Conway propane? The chart clearly shows there are times when Conway prices above Belvieu. Why wouldn’t this be one of those times, if inventories are a key to setting the price spread?
Before we answer, let’s back up to where the relationship was at this time last year. Early last year, with all of the new production flooding the Midwest and no place for it to go, Belvieu was trading at a 30-cent premium to Conway. That kind of spread allowed Midwest barrels to move into traditionally Gulf Coast-supplied markets, even by truck.
The premium came down by the end of winter, as late winter demand helped, but then spent the bulk of the summer somewhere between 15 cents and 35 cents.
Midwest propane inventory surpluses began to fall in late July. Not surprisingly, the spread between Belvieu and Conway began to fall. Perhaps the pace at which they came together was a bit surprising, but still justified given what was happening to inventory in both regions.
As we pointed out in the beginning, the huge discrepancy in inventory positions between the Midwest and Gulf Coast remains. So why in September did the spread stop coming together? Why didn’t Conway start pricing higher than Belvieu? Why did the spread start leveling out and recently become more consistent, with Belvieu holding about a 5-cent advantage?
First, we can’t let the current Midwest inventory make us think that more demand than supply exists in the Midwest, because that’s not the case. What has happened is new infrastructure is allowing product to move more freely from the Midwest to the Gulf Coast. For example, the new Southern Hills line can carry raw mix at about 150,000 bpd from Kansas, Oklahoma and the Texas Panhandle directly to Gulf Coast fractionators.
The reality is the Gulf Coast is the propane market. Producers there can access export facilities as well as vast and growing petrochemical demand for propane. That is where the new fractionation capability and storage options reside. In fact, having one’s production on the Gulf Coast provides more options and is the reason for the inventory imbalance.
There is a cost of moving product from the Midwest to the Gulf Coast – primarily pipeline tariffs. So that is the reason the price started leveling out.
We think the strong emphasis of moving production south makes the position of regional inventories less a factor in pricing. That is why the Belvieu propane price is not getting punished for its high inventory levels. That’s why Conway is not pricing above Belvieu. Going forward, we will probably put a lot more emphasis on total U.S. propane inventory than we do on regional inventory.
One thing is for sure – those who have played the Belvieu/Conway price spread, letting regional inventory positions be their primary guide, had best be aware of a potential paradigm shift.
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 firstname.lastname@example.org.
WEEK IN REVIEW
WTI looked as if it was going to let the momentum of the recent uptrend get away, but rallied back on Friday with a falling dollar helping.
Propane continued to get plenty of support from higher-than-average draws on inventory.
We went bearish on Thursday as we think the rally in crude and propane is getting overdone.
LAST WEEK'S DAILY HIGHLIGHTS
Monday: Conway propane prices had a volatile day before closing lower. Belvieu managed a slight gain, while crude rallied late in the day to cut earlier losses when the dollar began to fall, encouraging the buying of commodities.
Tuesday: Propane resumed its rally as winter weather and larger-than-expected draws on inventory over the previous two weeks encouraged buying. Crude reversed its trading action of the previous day by giving up early-day gains later in the day. Still, WTI managed a solid gain.
Wednesday: Propane prices bounced after the Energy Information Administration reported a third above-average draw on inventory in as many weeks. The inventory data was less supportive for crude, which stayed nearly level to Tuesday’s close. A turn higher by the dollar provided a headwind for crude.
Thursday: Propane prices continued to climb as traders reacted to above-average inventory draws and winter support. Lower initial jobs claims by U.S. workers helped encourage investors to take more risk with their investment money, helping crude to another gain.
Friday: There was a big surge in U.S. propane prices as buying pressure picked up. Belvieu did fade as the day progressed, but still finished higher. Conway held to a gain of 2.7 percent. A fall in consumer sentiment limited gains in crude.