Winter Propane Storage Draws Strong Since October

The once unthinkable level of 100 Bcf/d for U.S. natural gas production is just around the corner, it would seem. Lower-48 gas production last week hit a new high of 96.4 Bcf/d, after surpassing 95 Bcf/d not too long ago (in late October). That’s remarkable considering that production was only 52 Bcf/d just 12 years ago. Gas demand from domestic consumption and exports this year has set plenty of records of its own, but the incremental demand has not been nearly enough to keep the storage inventory from building a significant surplus compared with last year. CME/NYMEX Henry Hub prompt gas futures prices tumbled nearly 40 cents last week to $2.28/MMBtu, the lowest November-traded settle since 2015. Today, we break down the supply-demand fundamentals behind this year’s bearish storage and price reality.

Until just a few years ago, the rise and fall of U.S. propane inventories each year was driven in large part by winter weather: the colder the temperatures in the major propane-consuming areas, the bigger the draw on stocks. Things have gotten much more complicated lately, though, thanks to a combination of rapid NGL production growth, a generally booming propane export market, and the vagaries of petchem margins. Now, to get a handle on propane stocks, you not only need to be able to forecast the weather, you also need to monitor international propane arbs and steam cracker economics — oh, and crude prices too, because they have a significant effect on NGL output and propane supply. Today, we discuss the many factors that impact propane inventories and prices in this sometimes chaotic market.

Blood, Sweat & Tears 1969 hit, Spinning Wheel tells us: “What Goes Up, Must Come Down”, and U.S. propane stocks are no exception.  Having built to a record 106 MMBbl the week of November 20, 2015, (according to the Energy Information Administration – EIA), storage congestion became the topic of the day, but while this record is noteworthy, what is far more significant is the rapid descent propane stocks have taken since late November in spite of the 2015-16 El Nino “winter of no winter”.  This is the second non-winter that the U.S. has experienced over the past five years, the last one occurring in 2011-2012. However, there are big differences in today’s market dynamics relative to 5 years ago, namely propane exports to the tune of 850 Mb/d.    In today’s blog, we’ll walk through the market dynamics that have resulted in extremely steep propane stock draws since late November 2015.