People Get Ready – Will The Propane Market Be Prepared for Winter?

We are only two months away from the official start of propane heating season in the U.S., and inventories are 3.5 MMbbl lower than last year, or 2.6 MMbbl below the five-year week-on-week low. Volumetrically, it’s a story very much like last summer: Propane exports are running high and while production is up it’s not increasing fast enough to get inventories back to where we would like to see them. But propane prices are not behaving at all like last year. At this point in 2021, the price of propane was moving higher, both in absolute terms and relative to the price of crude oil. This year, prices have been falling for the past four months and are much weaker relative to crude than a year ago. With low inventories and low prices, what are the prospects for the propane market being prepared for the upcoming heating season? And what are the risks if there’s a cold-weather surprise? We’ll consider those issues and more in the blog series we begin today, focusing first on how we got here.  

The highly seasonal U.S. propane market is traditionally divided into two halves: April through September, when the industry builds inventories, and October through March, when inventories are drawn down to meet winter demand. About this time each year, the industry is laser-focused on the status and pace of inventory increases, and whether it looks like there will be enough supply to meet the expected surge in demand during the impending heating season, particularly if an unusual spell of sustained cold weather hits the market. In recent years this calculus has become increasingly complex as exports have overtaken total domestic demand for propane.

As shown in the left graph in Figure 1, total U.S. propane exports (blue bars) have been increasing at a relatively rapid rate, growing about 10% per year in the most recent four-year period. In contrast, the use of propane is down slightly in the U.S. petrochemical sector (yellow bar segments), with ethane the favored feedstock most of the time for steam crackers, and consumer demand (green bar segments — residential, commercial, industrial, agricultural, vehicle, other) has been close to flat for the past five years. The takeaway from this graph is that exports first moved higher than total U.S. demand in 2019 by about 175 Mb/d, and have kept increasing to the point where exports now exceed U.S. demand by a whopping 500 Mb/d.

The primary challenge for the U.S. propane market is — and always has been — seasonality. While petrochemical demand tends to be relatively constant throughout the year, and monthly propane exports don’t vary more than plus-or-minus 20% or so, consumer demand is highly seasonal, swinging on average by 750 Mb/d between the monthly high and low each year, with the difference between the demand high and low getting up to 975 Mb/d in years with a particularly cold month or two. As shown in the right graph in Figure 1, average monthly consumer demand can drop below 200 Mb/d in the summer and spike to almost 1,200 Mb/d in the winter. And as you might expect, the seasonal swing is proportionally far wider in colder states (Midwest, Northeast) than it is in the warmer states in the South and West.

U.S. Propane Exports, Demand and Seasonal Consumer Demand

Figure 1. U.S. Propane Exports, Demand and Seasonal Consumer Demand. Sources: EIA, RBN

* Consumer demand = residential, commercial, industrial, agricultural, vehicle, other

It is that seasonal swing in consumer demand that makes the level of inventories so important to propane marketers. Inventories must be available to meet demand in the winter months, and those inventories must be in the right places. Having inventories sitting in Texas does not do the market much good when a deep freeze hits Minnesota or a nor’easter sweeps across New England. The market must have socked away enough barrels in the right local market locations to meet demand when that cold weather hits. Which means the price paid for those volumes must be high enough to keep those barrels for the domestic market, rather than having them bid away by international buyers. That competition between domestic and international buyers now dominates the behavior of U.S. propane prices, both in the inventory fill season and the withdrawal season.

Propane Prices – 2022 versus 2021

Of course, exports are not the only factor influencing U.S. propane prices. The relationship between domestic demand and inventories has a big impact on the market, as does the price of crude oil. Generally speaking, higher crude prices are bullish for propane prices and vice versa. The relationship is in part due to propane demand in the petchem market (both domestic and international), which tends to bid up the price of propane when crude prices move higher. (For more on this dynamic, see Jumpin’ Jack Flash.) To make sense of how these factors interact to produce the propane price rollercoaster we’ve been on the past 18 months, we’ll do a deep dive on the price trends shown in Figure 2.

Mont Belvieu Daily Propane Price

Figure 2. Mont Belvieu Daily Propane Price. Source: OPIS

Back in 2020, with the onset of COVID, all energy commodity prices were down and propane was no exception, averaging only about 45 c/gal during the year. But by early 2021, most energy prices had recovered, and from January through May 2021, the price of propane averaged a relatively stable 87 c/gal (Period #1 in the blue circle), which was about 55% of the price of WTI crude oil, a fairly typical level for that ratio.  

Then in the month of June (Period #2), the price ran up from 80 c/gal to 110 c/gal, almost entirely due to the rapid increase of crude oil prices to the $70/bbl level during that period. At that point, propane exports were strong and inventories were not building nearly as much as in the prior two years. Over the next few weeks (Period #3) propane prices were relatively stable at about 110 c/gal. But market factors were in transition. Robust propane exports were continuing, propane inventories were dropping to a five-year low, and at the same time crude prices were moving into territory uncharted since before the meltdown of 2014-15. Most forecasters were predicting $100/bbl WTI crude oil before year-end. Around that time, natural gas prices in Europe were also going bonkers due to low inventories and cuts in Russian gas deliveries. All those factors came together to push propane prices from 110 c/gal all the way to 150 c/gal by early October (Period #4). Propane prices were being pushed up not only by those external market factors, but also by substantial buying activity by U.S. retail marketers and exporters who were getting in front of what seemed to be a confluence of disruptive market factors that they feared would continue pushing winter propane prices into 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, it turned out to be a classic propane-market head fake. Both the crude oil and European gas markets cooled. But what did not cool was winter weather, which stayed warmer than normal through the first few months of the 2020-21 propane heating season, taking the proverbial wind out of the market, made even more bearish by a relatively benign crop drying season that previous fall. Propane prices punished all those who built inventories in preparation for a cold winter, with the price dropping from 150 c/gal down to 100 c/gal by the week just before Christmas (Period #5). In summary, propane prices had run up prior to the onset of winter, then virtually collapsed when winter arrived. Ouch. Not the way it’s supposed to happen. That kind of market behavior had a big financial impact on those who built inventories at high prices in preparation for cold weather, only to sell those inventories at lower prices than expected.

There was one more uphill ramp on the propane price rollercoaster (Period #6) — right after Russia’s invasion of Ukraine. That took crude oil to $124/bbl in early March on a chaotic rise to exorbitant levels not seen since 2008. And blip-for-blip, propane went along for the ride, soaring to a high of 160 c/gal on the same day crude prices maxed out (Period #7). But then the fickle finger of propane fate arose from the chaos. Crude markets settled down. Weather in propane country was moderate, with few periods of sustained cold weather. The threat of increasing exports seemed to dissipate. And the price of propane drifted off for the next four months (Period #8). That got propane to where it is today, at almost the same level as it was this time last year.

There’s a point in slogging through all that recent propane market history. Today, inventories are below where they were this time last year. Exports year-to-date are up about 8%. And although crude prices are not ramping up, there is certainly nothing stable about the prices of oil given the ongoing Ukraine war and the impact of European and U.S. sanctions. Does that portend a repeat of last year’s fall propane price spike? If propane prices stay at their current levels, will there be enough inventories and production to meet a period of sustained cold weather, if it happens?

It all depends on market developments over the next few months. In the next blog in this series, we’ll examine the trajectory of propane inventory balances, possible export scenarios, how prices could be impacted 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 appears as the seventh song on The Impression’s fourth studio album of the same name. Released as the second single from the LP in February 1965, the song went to #3 on the Billboard R&B chart and #14 on the Billboard Hot 100 Singles chart. Mayfield wrote the song in 1964, after the March on Washington; the church bombing in Birmingham, AL; and the assassination of President Kennedy. Reverend Martin Luther King Jr. named it the unofficial anthem of the Civil Rights Movement. Many artists have covered the song over the years, including Aretha Franklin, Al Green, the Staple Singers, Bob Dylan, and Bob Marley, who combined the song with his “One Love.” Rod Stewart and Jeff Beck released a version in 1985, which went to #5 on the Billboard Mainstream Rock Songs chart and #48 on the Billboard Hot 100 Singles charts. The song was inducted into the Grammy Hall of Fame in 1998. Personnel on the original record were: Curtis Mayfield (lead vocals, guitar), Fred Cash, Sam Gooden (backing vocals), and various Chicago studio musicians assembled by producer Johnny Pate (instrumentation).

The album, People Get Ready, was recorded in 1964 at Universal Recording in Chicago, with Johnny Pate producing. All the songs on the album were written by Curtis Mayfield. Released in February 1965, the album went to #1 on the Billboard R&B Albums chart and #23 on the Billboard 200 Album chart. Three singles were released from the LP.

The Impressions were an American doo-wop, gospel, soul and R&B group formed in Chicago in 1958. R&B singers Jerry Butler and Curtis Mayfield both got their professional starts in the group. Mayfield started singing in a gospel choir in his youth. He met fellow singer Jerry Butler in Chicago when he was 14, and later joined Butler in The Impressions. After Butler’s departure from the group in 1962, Mayfield, along with Fred Cash and Sam Gooden — and under the direction of producer Johnny Pate — became the top-selling soul act, known worldwide as The Impressions. Mayfield left the group for a solo career in 1970. The Impressions released 20 studio albums, one soundtrack album,10 compilation albums and 76 singles. They are members of the Rock and Roll Hall of Fame and the Vocal Group Hall of Fame. Twelve members passed through the ranks of The Impressions since their formation. The group’s career spanned six decades before officially retiring the name in 2018.

Curtis Mayfield became one of the most influential musicians behind soul music and politically conscious African-American music. The American singer, songwriter, guitarist, and record producer started a successful solo career that yielded sixteen studio albums, six soundtrack albums, four live albums, nine compilation albums, and 34 singles. He has a Grammy Legend Award, Grammy Lifetime Achievement Award, and is a member of the Grammy Hall of Fame. He has been twice-inducted 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 performance in New York in August 1990. He continued to record and perform until his death in December 1999.

Source link

Leave a Comment