Things move fast in today’s propane market. Two weeks ago, Mont Belvieu propane was going for almost 95 cents/gal, up 86% from the mid-November price of only 51 c/gal. Midcontinent propane assessed in Conway, KS, spiked even higher, doubling over the same time frame to more than a dollar per gallon. But last week some air came out of the balloon, with Mont Belvieu and Conway prices pulling back to the low 80s. That didn’t last long either. This week, Mont Belvieu is back up to the high 80s c/gal. What gives? Is the market simply being bounced around by vacillating weather forecasts? Or is there more to it than that? Could it be that we are seeing symptoms of an export-driven transformation that is making propane markets behave quite different than they have in the past? Today, we’ll consider these questions and where the propane market may be headed in 2021 and beyond.
We’ve had this blog series about winter 2020-21 propane prices going since last November (Now You See It), when we warned of the possibility of a coming propane price squeeze. Even though we entered propane season with healthy inventories, exports were running at all-time highs, and it looked like stocks could be depleted at record rates. We were concerned that average days-supply, when calculated using both domestic demand and exports, had dropped to a five-year low, and that the market could get very tight. By January, as we detailed in Big Panama With A Purple Hat Band, that was just how it was playing out, with markets further complicated by long delays at the Panama Canal and, as a consequence, skyrocketing shipping rates due to a shortage of VLGCs — the vessels that move most U.S. propane to Asia and Europe.
Just as prices reached one-dollar-per-gallon territory in mid-January, the market came off hard, with Mont Belvieu propane (blue line in Figure 1) down by a dime in just over a week. Then the market bounced, recovering about half of the decline. But that may be nothing more than a short-term blip due to the surge of cold and snow hitting the U.S. Midwest and Northeast over the past few days. Because if we look at the forward curve for propane (green line), the market indicates that Mont Belvieu prices will soon be in steep decline, falling another dime over the next few weeks and sliding to the mid-60s c/gal by June (dashed red oval).
Figure 1. Mont Belvieu Non-TET Propane Price and Propane to Crude Ratio. Sources: OPIS and CME
So which is it? Are propane prices headed south as indicated by the forward curve? Or is propane poised for another run-up or two before this propane season is in the rearview mirror?
To answer those questions, we need to look at the most significant factor impacting the propane market this year. And that is not weather in the Midwest and Northeast. Instead, it is what is happening 7,000 miles away from Mont Belvieu — in Asia. So far, 2020-21 has been a wild winter in Asia, with record- or near-record-low temperatures experienced over the past few weeks in Japan, South Korea, and northeastern China impacting both LNG and LPG prices. As shown in Figure 2, it is pretty amazing how close Asia LNG and propane prices have correlated this year, and how the price of Asia propane has influenced U.S. markets. The left graph shows prices for Asia LNG (represented by JKM — the Japan Korea Marker), and Asia Propane (represented by FEI — the Far East Index) for July 2020 through January 12, 2021. As JKM skyrocketed from $2.20/MMBtu to more than $18/MMBtu, FEI propane moved higher in lockstep — not in magnitude but certainly in parallel, and in sympathy. After all, it was the same market dynamics driving both markets. And for that matter, some propane is spiked into Asia’s LNG system to boost supplies when it gets cold, so part of the demand for the two commodities really is the same market. Over the same timeframe, FEI (March contract) increased from about $335/metric ton to $552/MT.
More significant for our purposes here is the right graph in Figure 2. Mont Belvieu non-TET propane prices have closely tracked the trajectory of Asia propane and LNG (R² = 0.91 for you statisticians). In other words, this bit of evidence tells us that the price of propane in Mont Belvieu over the past few months has been heavily influenced by the price of propane in Asia. We have a lot more evidence that corroborates this conclusion. (We’ll get back to what happened after January 12 in a minute.)
Figure 2. Asia LNG (JKM), Asia Propane (FEI), and Mont Belvieu Propane. Sources: ICE/Argus and OPIS
So, the first question: Is this merely coincidence? Sure it’s been cold in Asia, but what about the weather in the U.S.? Was the run-up in U.S. propane prices simply a reaction to cold weather much closer to home? Well, in part. In early January, some weather forecasts were expecting a repeat of 2013-14 Polar Vortex conditions, and that spooked the market. But those forecasts soon dissipated. What we have actually seen is weather that has been somewhat cooler but not cold enough to have had the impact on either inventories or prices we’ve seen over the past few weeks. As shown in Figure 3, so far the winter 2020-21 has been middle-of-the-road weatherwise in the parts of the U.S. that depend heavily on propane. The left graph shows winter season (October-March) average monthly U.S. heating degree days (HDDs) weighted by propane population for each EIA PADD district, then averaged by propane demand in each PADD. The idea is to compute a representative index of winter severity (or lack thereof) for each year in propane country.
As you might expect, the real Polar Vortex winter of 2013-14 was the coldest in the past decade, with an average of 29 HDDs, while 2015-16 was the warmest, with only 19 HDDs. The following two winters were colder, but temperatures warmed back up a year ago in the winter of 2019-20. As we noted in Now You See It, those warm temperatures resulted in low propane prices last winter. For comparison, the price of Mont Belvieu propane during the winter of 2019-20 was only 43 c/gal, while back in 2018-19 the propane price was way up at 73 c/gal. So far in the winter of 2020-21, the price has averaged 62 c/gal.
Figure 3. Average Degree Days. Source: DTN
That’s the big picture. The right graph in Figure 3 shows what’s been happening lately, comparing monthly HDDs for the winter of 2019-20 to this winter to date in PADD 1 (East Coast) and PADD 2 (Midwest/Midcontinent). These two PADDs account for more than 60% of U.S. propane consumer demand and are the regions with by far the most sensitivity to weather. This winter season started out warm, with HDDs in November 2020 well below November 2019 (dashed red ovals). But in December and January, we saw some cold weather — just not materially colder than a year ago. Which begs the question, if it’s not that much colder, why are prices so much higher this year than last?
Of course, the #1 culprit is exports. According to RBN's NGL Voyager Report, Gulf Coast propane exports to overseas markets hit another all-time record during the first two weeks of January, coming in at 1.4 MMb/d (left graph in Figure 4), or about 17% higher versus January 2020. These exports have been happening even with high prices in the U.S. and, as we covered in Big Panama, even with freight costs in the stratosphere. The moral to this story is that when it gets cold in Asia and they need the propane, exports are going to move, regardless of the consequences for U.S. propane inventories.
Figure 4. Gulf Coast Propane Exports and Weekly EIA Propane/Propylene Stocks. Sources: RBN and EIA
The right graph in Figure 4 depicts those consequences so far this propane season. In EIA’s Weekly Petroleum Status Report released last Friday for the week ending January 15, propane inventories declined by 6.2 MMbbl from the prior week, a huge decrease of 890 Mb/d (red line and dashed yellow circle). That puts propane inventories at 60 MMbbl, which is about 20 MMbbl below this time last year (blue line), 7.1 MMbbl (or 10.6%) below the five-year average, and only 8.5 MMbbl above the five-year low. Over the past few weeks, the largest draws have not been from the areas of most propane demand, PADDs 1 and 2 (down 34% and 38%, respectfully). Instead, they’ve been from PADD 3 — the Gulf Coast (down 47%), which is responsible for two-thirds of the total U.S. decline in inventories this season. The obvious conclusion: U.S. inventories have been sucked down by exports out of Gulf Coast terminals.
Which gets us to the point of all this. As we said back in November (see Now You See It, Part 2), to really understand what is going on in today’s propane market, one of the best indicators to look at is average days-supply, calculated to include both U.S. propane demand and exports. The EIA computes a days-supply number and shows it each week in its This Week in Petroleum report based on the level of stocks divided by the four-week average of “product supplied,” a surrogate stat representing domestic demand. That indicator, with its laser-focus on U.S. demand, was an appropriate measure for the propane market in the decades before major exports, and has ranged from a low of 23 days in the depths of the winter of 2017-18 to a high of 121 days in November 2015. Last week, the EIA propane days-supply number was 32.2 days.
But today, more propane moves across the docks to Asia than the entire volume used within the U.S. in an average winter. So to get a good indication of the relationship between demand and inventories today, it is important to include exports in the equation — after all, total demand really is the sum of domestic demand and exports. That way we can compare month to month how much propane we have in storage versus how much is going to market, whether that market is within the U.S. or somewhere else. That’s what we show in Figure 5.
Figure 5. Average Total Days-Supply [Stocks/(Domestic Demand + Exports)]. Sources: EIA and RBN
Computed that way, total days-supply so far in 2021 (green line) has been plunging toward the low of the five-year range for the past three weeks, averaging only 18 days based on last week’s EIA report. It is certainly possible, if not likely, that this days-supply measure will set record lows over the next two months of propane winter.
So where are we now? In the first half of January, Mont Belvieu and Conway propane prices skyrocketed in sympathy with prices in Asia, low inventory levels in the U.S. due to exports, and the threat of a Polar Vortex weather event (that ultimately did not materialize). But then prices in Asia declined. LNG was off particularly hard from $18.31/MMBtu to $8.52/MMBtu last week as the contract rolled from February to March. At the same time, Asia propane (FEI) pulled back about 10%, and Mont Belvieu propane dutifully followed FEI, also declining about 10%. A few U.S. VLGC export cargoes were cancelled due to poor export economics. In the past couple of days, Mont Belvieu prices perked back up in response to a spate of cold weather in the Midwest and Northeast, coming in at 88.3 c/gal yesterday according to OPIS. Is this the final throes of winter, or might there be more volatility ahead?
At this point, the short term is all in the hands of Mother Nature. Inventories are low, so more cold weather could certainly result in another price spike before the winter is over. But we are nearing the end of the propane season, and no one wants to be holding a lot of propane inventories as the weather starts to warm. So most likely, propane prices will start to decline, as anticipated by the forward curve in Figure 1. But there is a lot of uncertainty around how that might play out this year. Export economics and the impact of exports on inventories have been the primary drivers for propane prices. And the demand for propane exports is influenced by events far beyond U.S. borders. For example, there are a number of new petrochemical facilities coming online in Asia — primarily Chinese propane dehydrogenation (PDH) facilities — that will increase the demand for propane in the region in the coming months.
That reality not only alters how we must think about prices, it shifts the entire supply/demand equation to be as dependent on demand in Asia as it is on demand in U.S. propane country. Or, as we hinted at in the title of today’s blog, “It’s all over now” for the traditional metrics for understanding U.S. propane. In the next episode of this series we will explore what that is likely to mean for propane markets, balances, and contracting practices.
"It's All Over Now" was written by Bobby and Shirley Womack. It was first released in June 1964 by The Valentinos, which featured Bobby Womack, and went to #94 on the Billboard Hot 100 Singles chart. After hearing The Valentinos’ version on an advanced copy that New York City DJ “Murray the K” played for them, The Rolling Stones recorded their version nine days later at Chess Studios in Chicago with Andrew Loog Oldham producing. Releasing their version only 16 days after recording it in June 1964, the song went to #1 on the UK Singles chart and #26 on the Billboard Hot 100. The song would later appear as the sixth song on side one of The Rolling Stones' second American studio album, 12 x 5. Personnel on the record were: Mick Jagger (lead vocals), Keith Richards (lead guitar, backing vocals), Brian Jones (12-string guitar), Bill Wyman (bass), and Charlie Watts (drums).
12 x 5 was an expanded version of The Rolling Stones' British EP, Five by Five, geared for the American market. Produced by Andrew Loog Oldham, it was released in October 1964 and went to #3 on the Billboard Top 200 Albums chart. Two charting singles were included on the album. It has been certified Gold by the Recording Industry Association of America.
The Rolling Stones are an English rock band formed in London in 1962 by Mick Jagger, Keith Richards, Brian Jones, Bill Wyman, and Charlie Watts. Jones left the band one month before his death in July 1969. He was replaced by Mick Taylor, who left the band to be replaced by Ronnie Wood in 1974. Bill Wyman left the band in 1993, and Darryl Jones has been their bassist since that time. The Rolling Stones have released 30 studio albums, 33 live albums, 29 compilation albums, three EPs, and 121 singles. They have won one Billboard Music Award, four Grammy Awards, seven Grammy Hall of Fame Awards, three MTV Video Music Awards, and two World Music Awards. The Rolling Stones were inducted into the Rock and Roll Hall of Fame in 1989. They still record and tour.