It Don't Mean a Thing If It Ain't Got That Swing!

A lot has been made recently of higher propane exports and declining propane inventories in September. To understand what’s happening, let’s look at a few important relationships that have either swung wider in one direction or swung in a different direction since this summer:

  1. The first thing we need to consider is the sharp backwardation that’s in the marketplace. The market was in contango this summer (worth more each forward month), but has now swung into sharp backwardation (worth less each forward month). That means the folks that make our propane have little incentive to store propane for future sales. So, it’s a “sell now” mentality, especially true for propane exports. Backwardation in a marketplace discourages inventory building.  
  2. The second thing to consider is the WTI/Brent spread which has swung wider recently. As the spread between WTI (US) and Brent (International) widens, those products refined from WTI (including propane) will have more export appeal. Freight differences matter less when the underlying cost of a product has a greater price advantage.    

The recent historical spread between WTI and Brent is in the $3.00 bbl. range. Here’s a look at the past three years and a projection for 2018:

Uploaded Image: /uploads/blog-photos/RE Swing Chart-2.jpg

But, look what happened shortly after Hurricane Harvey when Gulf Coast refinery production was shut down for weeks:

Crude Oil Front-Month Futures Prices:

WTI - Brent Spread

Notice the spread widening in September. In fact, the WTI/Brent spread for the month of September swung all the way out to $6.40 per barrel and is still trading in that $6.00 range!

Conclusion:

Unfortunately, the circumstances that came together in September to drive propane prices up and inventories down have not changed substantially.

EIA numbers for the week:

  • Propane inventories fell by 0.1 mmbbls. (78.83 US total).
  • Gulf coast inventories dropped by .851 mmbbls. (41.42); Midwest inventories rose by .403 mmbbls. (27.27).
  • Total U.S. propane inventories are 24% behind last year, in the lower half of the five-year average range.
  • Exports stay robust, due largely to the recent swing from a market in contango (worth more each forward month) to strong backwardation (worth less each forward month). A "sell now" mentality exists.

What’s happening with propane prices?

Here are the Mt. Belvieu monthly averages for the past 10 months with a projection for October:

Uploaded Image: /uploads/blog-photos/RE-OCT-Newsletter-Price-Chart_1017_Final2.png

The Skinny:

Propane will stay in America if it's contracted to stay here. Take a look at your upcoming propane requirements. If you're under-contracted, cover your anticipated shortfall with additional supply from Ray Energy.

 

 

 

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