US Propane Prices Plummet Amid Production Boom

Way back in the spring of this year, propane prices were behaving themselves. Mont Belvieu values were high relative to the previous two years, but no higher than what they ought to be with crude oil up to the mid-$70s/bbl range, as it was back then. Yet, market players were uncomfortable. Production was flat, exports were strong, and inventories were not increasing fast enough to get balances where they needed to be by winter. At that point the market got nervous and started bidding the price of propane higher. When exports continued at high rates and it looked like $100/bbl crude was a real possibility, propane buyers went into a feeding frenzy, and by early October propane prices blasted to levels not seen in a decade. Then the market calmed down. Weekly inventory numbers from EIA started to look like they might be OK after all, exports backed off, and propane prices started to decline. That’s supposed to happen toward the end of heating season, not at the beginning. The frenzy soon turned into a rout in a counter-seasonal price move egged on by concern about the COVID-Omicron variant that saw propane collapsing by 35% over a five-week period. All that price action happened during the summer and fall, instead of during the winter, as it usually does. We just got ahead of ourselves. So, what happens next? That is what we will consider in today’s RBN blog, which is Part 2 of our Different Drum NGL blog series.

Wow, what a ride! That’s what came to mind yesterday as the 2020-21 propane season drew to its official end. But the excitement and uncertainty aren’t over, folks. Not by a long shot. Propane exports are still running sky-high; end-of-season inventories are at the low end, with a whopping 2-MMbbl withdrawal number in EIA’s stats yesterday; and a backwardated forward curve is not doing anything to encourage U.S. marketers and midstreamers to rebuild stocks.  We get it — no one wants to think about next winter yet, just as spring is really springing. But still, you’ve got to wonder, could the dynamics that have been roiling the propane market be setting us up for skinny inventories and price spikes in the 2021-22 propane season? Today, we examine the challenges facing the propane market over the next few months.

Propane prices at Mont Belvieu soared above $1/gallon on Wednesday — the first time that’s happened in the month of June since 2014. This buck-and-change price doesn’t come as much of a surprise for industry insiders, however. U.S. propane inventories have been very skinny lately, sitting at 56.2 MMbbl — or only 587 Mbbl above the five-year minimum based on yesterday’s EIA data. At the same time, propane exports have been riding high, averaging 1.3 MMb/d so far this year, up nearly 90 Mb/d from the same time frame in 2020, while production has remained virtually flat over the past 18 months. Surprise or not, the spike past $1/gal raises an important question: How high will U.S. propane prices have to go before exports are reined in so U.S. inventories can increase? Today, we discuss the key drivers behind the current price level and our propane market outlook for the second half of the year.