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.
About three months ago, in Should I Stay or Should I Go, we said that the combination of stronger propane exports, lower U.S. inventories, and higher crude oil prices would be super bullish for propane prices. Well, since then, the price of Mont Belvieu (non-TET) propane has increased by over 12 c/gal while the price of WTI crude oil has risen by roughly $14/bbl. We also established that, in terms of exports, there is adequate dock capacity for LPGs available as well as very strong global demand for U.S. propane, particularly from Asian petrochemical crackers and PDH (propane dehydrogenation) plants. In other words, the only constraints on U.S. exports were U.S. production and U.S. prices. We are now a few months down the road and U.S. prices have surged, but exports continue to be strong. What’s up with that?! Weren’t higher prices supposed to put the brakes on exports?
Here’s where the market stands today. According to our good friends at OPIS, the Mont Belvieu propane price on Wednesday came in at 101.1 c/gal and Conway at 99.75 c/gal, or nearly double where they were this time last year; the Mont Belvieu non-TET price has averaged 87.7 c/gal year to date in 2021 compared to 46.4 c/gal in 2020. As shown in Figure 1, the current Mont Belvieu price (right end of red line) is 83% above the six-year average (black line), and 19% above the six-year maximum (top of gray-shaded area), which occurred in 2018, and has already surpassed the $1/gal mark posted earlier this year during February’s Deep Freeze. The primary driver of this year’s high propane price is exports, which have been running at or near all-time record levels since the COVID recovery kicked in last fall, with the only exceptions being slowdowns related to the weather: hurricanes, fog, or the February Deep Freeze. The problem is, with exports running strong and U.S. propane production (excluding propylene) relatively flat just south of 2 MMb/d over the past year and a half, there is just not enough supply to meet high levels of international demand and at the same time build U.S. stocks back to where they need to be before the upcoming 2021-22 winter heating season.
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