Exactly the same product. Exactly the same day. In storage very nearby. Yet their prices diverged by 17 cents per gallon — a spread equivalent to $7 per barrel. That’s a very substantial difference for prices that typically are almost indistinguishable, differing by an average of only 0.3% in recent years. The disparity roiled the financial underpinnings of exports for over a month and busted numerous inventory hedges. Is this some rare commodity? Hardly. It’s Mont Belvieu propane, the Rock of Gibraltar benchmark propane price in the U.S., and to a great extent around the world. But during October there was a crack in that rock a mile wide.
At the end of September, the price of TET propane, which is the Energy Transfer marker commonly used for financially hedging most propane exports and as an index for some domestic contracts, dropped sharply compared to the price of Non-TET propane at Enterprise Products Partners literally next door in Mont Belvieu. The spread stayed wide for the entire month of October. Non-TET is the price reference for more than two-thirds of physical propane exports and serves as the benchmark index for domestic supply. (For more on how this works, see Let's Get Physical.)
The market was thrown into a tizzy. Hedges went awry, and some traders faced big losses. As usual when such events happen, conspiracy theories abound. Intentional price rigging. Engineered capacity constraints. Infrastructure failure. Or could it be as simple as maintenance at a Nederland, TX, dock? In today’s RBN blog, we’ll explore what happened in the propane market last month and provide a primer on the quirks in the propane market that from time to time can cause price differentials to swing wildly.
So, what happened in October? Put simply, the premium of Non-TET propane over TET propane in Mont Belvieu went bananas, averaging a level far outside the norm and peaking several days at record marks. As we said in our introduction, this is not simply some arcane NGL differential that makes little difference to propane markets. Instead, it’s a key aspect in the important business of propane exports, since the largest volume of physical propane shipped from Gulf Coast terminals is sourced from locations priced at the average Non-TET price (the price for propane deliverable from Enterprise’s storage caverns), while the TET price index (the price for propane deliverable from Energy Transfer’s storage) is most often used as the marker for financial hedging to manage price risk. And it’s not just exports. About 90% of all propane hedges use TET-based financial instruments for physical volumes valued at TET as well as those valued at non-TET pricing, exposing those transactions to the same price differential risk as the exporters.
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TET versus Non-TET TET and Non-TET refer to Mont Belvieu NGL price indices, also sometimes called LST and Non-LST. These terms have deep roots in NGL market lore. The names TET and Non-TET date back several decades to when Texas Eastern Transmission Company (TETCO) operated the TEPPCO pipeline, which in those olden days moved large volumes of propane from its Mont Belvieu storage facility to the Midwest and Northeast. The market began to refer to prices at that facility as TET, a convention formalized by Oil Price Information Service (OPIS) as the TET price. Other trading locations at Mont Belvieu became known as Non-TET. The story of how these naming conventions evolved, along with the history of the TEPPCO pipeline reaching back to World War II, is explored in the epilogue at the end of this blog. |
This decades-old vestige of propane markets rarely causes a problem, let alone a minor crisis. As shown in the left graph in Figure 1 below, for the past 11 years, TET propane has averaged 0.32 c/gal (about one-third of a cent; red line) above Non-TET and the differential has remained quite stable: The annual average has never been above +0.2 c/gal or below -0.7 c/gal.
Figure 1. Differentials Between TET and Non-TET Propane at Mont Belvieu. Source: OPIS
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