The Differen(tial) Between Us - What Drives Big Propane Price Spreads?

For a few days in late July, the price differential between propane stored at Enterprise Products Partners’ salt caverns in Mont Belvieu, TX, and propane stored at facilities owned by others a few hundred yards away quickly widened to as much as 10 cents/gallon. That’s by far the biggest spread of its type we can recall, and while we can’t say for certain what caused the “Enterprise-vs.-others” propane differential to blow out, there’s a likely — and familiar — culprit: NGL infrastructure constraints. Something else this unusual pricing event confirmed is that, no matter where the NGL storage, fractionation or pipeline constraint may occur, it almost always has an outsized effect on the much smaller NGL storage and fractionation hub in Conway, KS. What’s with that? Today, we look at the recent, rapid slide in propane prices at Enterprise’s Mont Belvieu storage facility and discuss what it tells us.

NGL markets are a favorite topic of ours in the RBN blogosphere, maybe because of their complexity and the fun — yes, we admit it, the fun — we have figuring out why the markets are doing what they’re doing. Take propane, one of the five major “purity products” that result from the fractionation of mixed NGLs (also known as y-grade) into their component parts. Propane is probably the most widely known of the purities among the general public, mostly because of its associations with outdoor grilling, home heating and Hank Hill — assistant manager at Strickland Propane in Arlen, TX, and star of the long-running animated sitcom, “King of the Hill.” As we said in Complicated back in April, the propane market has become a lot more, well, complicated the past two or three years, thanks to a combination of rapid NGL production growth, a generally booming propane export market, and the vagaries of petchem margins. Back in Hank Hill’s day (the show went off the air in 2011), 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. 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.

There also used to be norms in propane price relationships that you could pretty much count on. For example, as we said in We’re Not in Kansas Any More, for most of the 2010s, the differential between propane prices at Mont Belvieu and Conway averaged less than a nickel per gallon, which basically reflects the cost of moving barrels 700 miles north-to-south. However, as Figure 1 shows, the Mont-Belvieu/Conway spread (blue line) occasionally blew out, typically during periods of infrastructure constraints or unusually cold weather. In 2012, for instance, the differential widened as Midcontinent producers awaited the completion of the Arbuckle NGL pipeline expansion from the Midcon to Mont Belvieu (red oval). [For this graph, the Mont Belvieu propane price is an average of the Enterprise value (historically called the non-TET price), the Targa/”Other” non-TET price and the Energy Transfer/Lone Star NGL value (historically called the TET/LST) price; these three prices are generally very similar, but not always — more on this in a moment.]