People are getting ready – will the propane market be prepared for winter?
We’re just two months away from the official start of the US propane heating season, and stocks are 3.5 million barrels per day lower than last year, or 2.6 million barrels per second below a five-year low. In terms of volume, it’s a story a lot like last summer: Propane exports are going up, and while production is up, it’s not increasing fast enough to get stocks back where we’d like to see them. But propane prices aren’t behaving at all like last year. At this point in 2021, the price of propane was rising, both in absolute terms and relative to the price of crude oil. This year, prices have fallen over the past four months and are much weaker compared to oil compared to last year. With low inventories and low prices, what are the prospects for preparing the propane market for the upcoming heating season? And what are the risks in the event of a sudden cold weather? We’ll look at these issues and more in the blog series we’re starting today, focusing first on how we got here.
The seasonal US propane market is traditionally divided into two halves: April to September, when the industry builds up stocks, and October to March, when stocks are drawn down to meet winter demand. Around this time each year, the laser industry focuses on the status and pace of inventory buildup, and whether it looks like there will be enough supply to meet the expected increase in demand during the impending heating season, especially if an unusual wave of persistent cold weather hits the market. In recent years, these calculations have become increasingly complex as exports have exceeded total domestic demand for propane.
As shown in the left graph in Figure 1, total US propane exports (blue bars) have increased at a relatively rapid rate, growing about 10% annually in the last four years. In contrast, propane use has decreased slightly in the US petrochemical sector (yellow stripe sectors), where ethane is the preferred feedstock most of the time. steam crackers, and consumer demand (green stripe sectors – residential, commercial, industrial, agricultural, vehicle, etc.) The bottom line from this graph is that exports first moved higher than total US demand in 2019 by about 175 MB/day, and have continued to increase to the point where exports now exceed US demand by a whopping 500MB/day.
The primary challenge to the US propane market is – and always has been – seasonality. While demand for petrochemicals tends to be relatively constant throughout the year, and monthly propane exports vary by no more than 20% or more, consumer demand is highly seasonal, oscillating on average by 750MB per day between monthly highs. . And low every year, with the difference between high and low demand going as high as 975Mbps per day in years with a month or two particularly cold. As shown in the right-hand graph in Figure 1, average monthly consumer demand can drop as low as 200 MB/day in summer and reach nearly 1200 MB/day in winter. As you might expect, the seasonal swing is relatively wider in the cooler states (Midwest, Northeast) than it is in the warmer states of the South and West.
Figure 1. US propane exports and demand and seasonal consumer demand. Sources: EIA, RBN
* Consumer Demand = Residential, Commercial, Industrial, Agricultural, Vehicles, Other
It is this seasonal fluctuation in consumer demand that makes the level of stocks so important to propane marketers. Stocks must be available to meet the demand in the winter months, and those stocks must be in the right places. Having stocks in Texas doesn’t do the market much good when deep freeze hits Minnesota or Norster sweeps across New England. The market must have emptied enough barrels at the appropriate local market locations to meet the demand when this cold weather hits. Which means the price paid for these volumes has to be high enough to hold those barrels for the domestic market, rather than having them up for bid by international buyers. Competition between domestic and international buyers now dominates propane price behavior in the United States, both in the stock fill season and the pull season.
Propane Prices – 2022 vs 2021
Of course, exports are not the only factor affecting propane prices in the United States. The relationship between domestic demand and inventory has a significant impact on the market, as well as the price of crude oil. Generally speaking, higher crude oil prices are bullish relative to propane prices and vice versa. The relationship is partly due to propane demand in the petrochemical market (domestic and international), which tends to raise the price of propane when crude oil prices rise. (For more information on this dynamic, see Jumpin’ Jack Flash.) To understand how these factors interact to produce the propane price roller coaster that we have been in over the past 18 months, we will take a deep dive on the price trends illustrated in Figure 2.
Figure 2. The daily propane price of Mont Bellevue. Source: OPIS
Back in 2020, with the advent of COVID, prices for all energy goods have fallen and propane was no exception, averaging only about 45 cents/gallon during the year. But by early 2021, most energy prices had recovered, and from January through May 2021, propane averaged 87 cents/gallon (period #1 in the blue circle), which was about 55% of the WTI price. Crude oil, which is a fairly typical level for that ratio.
Then in June (period #2), the price rose from 80 cents/gallon to 110 cents/gallon, roughly due to the rapid increase in crude oil prices to the level of $70 per barrel during that period. At that point, propane exports were strong and stocks were not piling up as much as they had in the past two years. Over the next few weeks (period #3), propane prices were relatively stable at around 110 g/gallon. But market factors were in transition. Strong propane exports have continued, propane stocks have fallen to a five-year low, meanwhile crude oil prices have been heading into uncharted territory since before the crash in 2014-2015. Most forecasters were expecting $100/barrel of WTI oil before the end of the year. At the time, natural gas prices in Europe were also trending higher due to lower inventories and reductions in Russian gas shipments. All of these factors combined to drive propane prices from 110 c/gal to 150 c/gal by early October (period #4). Propane prices were driven up not only by these external market factors, but also by significant buying activity by US retail marketers and exporters who were standing in front of what appeared to be a set of turbulent market factors that they feared would continue to drive winter propane. Prices are in the stratosphere.
[RBN’s U.S. Propane Infrastructure Map fits together all the pieces of an opaque and regionally fragmented propane market, to reveal the extensive domestic propane network into a clear concise map. Click here for more information.] color:#222222″/>
Of course, they turned out to be fakes in the classic propane market. European crude oil and gas markets have cooled. But what wasn’t cold was winter weather, which stayed warmer than usual during the first few months of the 2020-21 propane heating season, taking the wind off the market, making it even more bearish due to the relatively mild crop drying season that preceded it. Drops. Propane prices penalized all those who built stocks in preparation for the cold winter, dropping the price from 150 cents/gallon to 100 cents/gal by the week just before Christmas (period #5). In short, propane prices rose before the onset of winter, and then nearly collapsed with the onset of winter. ouch. Not the way it’s supposed to happen. This type of market behavior had a significant financial impact on those who built stocks at high prices in preparation for cold weather, only to sell those stocks at lower prices than expected.
There was another downhill climb on the propane price roller coaster (period No. 6) – right after the Russian invasion of Ukraine. This sent the price of Crude Oil up to $124 per barrel in early March in a chaotic rise to exorbitant levels not seen since 2008. Crude oil prices reached their maximum (period #7). But then the fickle finger of propane’s fate arose out of chaos. Crude oil markets have stabilized. The weather in propane country was mild, with few periods of continuous cold weather. The threat of increased exports appears to have dissipated. The price of propane deviated over the next four months (period #8). This has brought propane to what it is today, roughly the same level as it was this time last year.
There is a point in delving into all the history of the modern propane market. Today, stocks are lower than at this time last year. Year-to-date exports are up about 8%. And while crude oil prices are not rising, there is certainly nothing stable about oil prices given the ongoing war in Ukraine and the impact of European and US sanctions. Does this portend a repeat of last fall’s propane price hike? If propane prices remain at their current levels, will there be enough inventories and production to weather a period of persistent cold weather, should that occur?
It all depends on market developments over the next few months. In the next blog post in this series, we’ll examine the path of propane stock balances, potential export scenarios, how prices could be affected by crude oil markets, and what kind of risks propane marketers may face in the 2022-23 propane season.
“People Get Ready” was written by Curtis Mayfield and featured as the seventh song on The Impression’s fourth studio album of the same name. The song was released as a second single from the LP in February 1965, and went to number three on the Billboard R&B chart and number 14 on the Billboard Hot 100 Singles chart. Mayfield wrote the song in 1964, after the Washington March. church bombing in Birmingham, Alabama; and the assassination of President Kennedy. Reverend Martin Luther King, Jr. called it the unofficial anthem of the civil rights movement. Several artists have covered the song over the years, including Aretha Franklin, Al Green, Staple Singers, Bob Dylan, and Bob Marley, who have combined the song with One Love. Rod Stewart and Jeff Beck released a version in 1985, which went to No. 5 on the Billboard Mainstream Rock Songs chart and No. 48 on the Billboard Hot 100 Singles chart. The song was inducted into the Grammy Hall of Fame in 1998. The staff on record for the original record were: Curtis Mayfield (lead vocals, guitar), Fred Cash, Sam Gooden (backing vocals), and various Chicago studio musicians assembled by producer Johnny Bate ( devices).
album, Get ready people, was recorded in 1964 at Universal Recording in Chicago, with the production of Johnny Butt. All songs on the album were written by Curtis Mayfield. Released in February 1965, the album went to #1 on the Billboard R&B Album chart and #23 on the Billboard 200 Album chart. Three solo LPs have been released.
Impressions It was an American Doo-Wop, Angel, Soul, and R&B group formed in Chicago in 1958. R&B singers Jerry Butler and Curtis Mayfield both made their professional beginnings in the group. Mayfield began singing in a gospel choir in his youth. He met fellow singer Jerry Butler in Chicago when he was 14, and later joined Butler on The Impressions. After Butler left the group in 1962, Mayfield, along with Fred Cash and Sam Godin – and under the direction of producer Jonny Butt – became a best-selling soul act, known worldwide as Impressions. Mayfield left the group for solo work in 1970. The Impressions released 20 studio albums, 1 soundtrack album, 10 group albums, and 76 singles. They are members of the Rock and Roll Hall of Fame and Vocal Group Hall of Fame. Twelve members have passed through the ranks of Impressions since its formation. The group’s professional career spanned six decades before the name officially retired in 2018.
Curtis Mayfield became one of the most influential musicians behind politically conscious African-American soul and music. The American singer-songwriter, guitarist, and record producer began a successful solo career that resulted in sixteen studio albums, six vocal albums, four live albums, nine group albums, and 34 singles. He is the recipient of a Grammy Legend Award, a Grammy Lifetime Achievement Award, and is a member of the Grammy Hall of Fame. He was inducted twice into the Rock and Roll Hall of Fame, once as a member of The Impressions, and as a solo artist. Mayfield was paralyzed from the waist down after lighting equipment fell on him during a show in New York in August 1990. He continued to record and perform until his death in December 1999.