Farmer's Blues, Part 2 - Can PADD 2 Propane Consumers Count on Canada to Save the Day?

Propane stockpiled in Canada has often been a mid-winter godsend for propane consumers in the U.S. Midwest and Great Plains states. If supplies in PADD 2 ever got tight due to unusually cold weather, greater-than-normal crop-drying demand and/or kinks in the U.S. supply chain, the higher prices spurred by the shortfall would incent more Canadian propane to be piped, railed or trucked south. This winter may be different, though. A new propane export terminal in British Columbia and steady-as-she-goes exports from the U.S.’s northern neighbor to PADDs 2 and 5 have left Canadian propane inventories nearly one-third lower than a year ago, and propane in the Edmonton, AB, hub is selling at a far-from-typical premium to propane at Conway, KS, and Mont Belvieu, TX. Today, we explain why a supply-demand imbalance in the U.S. heartland this winter might be harder to fix.

As we said a couple of weeks ago in Part 1 of this mini-series on PADD 2 propane demand this fall and winter, cold weather and spiking demand from Midwest and Great Plains farmers trying to dry their late-maturing, soggy crops have sent the regional propane market into a tizzy. Supply is not a major issue, at least not yet — propane inventory levels within PADD 2 are only a little below average, and stocks are plentiful along the Gulf Coast in PADD 3. But distributing propane by rail and truck for crop-drying use in PADD 2 has been a headache. As a result, farmers have been scrambling to get more of the fuel, and propane prices in the U.S. heartland have been on the rise. We also hinted that, if things get even worse, Canadian suppliers may not be able to come to the rescue as they have in the past.

This time, we focus on that angle, beginning with a brief recap of propane-related developments in Canada. To put it simply, propane producers and marketers in Canada have been on a wild bronc ride the last five-plus years, in large part due to (1) rising NGL and propane production in the U.S., which has reduced the need for Canadian exports to the U.S., and (2) the May 2014 reversal and conversion of the Cochin Pipeline, which used to transport Western Canadian propane to the U.S. Midwest but now moves U.S.-sourced condensate and natural gasoline to the Alberta oil sands for use as a diluent. These shifts put producers up north in a real bind: their propane output was rising too, driven by their focus on NGL-rich natural gas (so they could produce natural gasoline for use as a diluent), but with modest local demand for propane and major pipeline takeaway constraints, increasing volumes of propane were essentially stranded in storage in and around Edmonton. Prices for propane at the hub fell into negative territory several times in the spring of 2015 — yes, you actually had to pay someone to take your propane.