It’s been a wild and woolly December in the U.S. propane market. The Mont Belvieu propane price is up by almost 40%, blasting past 70 c/gal on Friday — a level not seen since February 2019, when WTI at Cushing was trading at $57/bbl, $8/bbl above where that price sits today. Is it simply cold weather goosing demand? Sure, that’s one factor. But it’s really all about exports. Just as 2020 cold weather finally arrived in U.S. propane country, exports hit the highest levels ever recorded. December Gulf Coast export volumes — 92% of the U.S. total — are up 21% over last month, and 39% above December 2019. So both international and domestic demand are pulling hard on supplies at the same time. No wonder propane prices are soaring. We started this series on winter 2020-21 supply/demand in late November by suggesting that there could be a few gotchas still out there that were not being reflected in the forward propane market. Well, we’ve now seen one of those gotchas. But there’s a lot of winter left to go — in fact, the official start of winter is this morning! Today, we review what’s happened so far in propane markets, and what could be coming next.
In Part 1 of this series, we started by showing how strong propane prices have been this year on a relative basis, meaning in comparison to crude oil. Focusing on the period between June and November, in 2019 the price of propane was only 34% of crude, while this year it has averaged a much higher 53%. (As a general rule, propane is considered to be expensive relative to crude when that ratio is above 50%, and cheaper when the ratio is below 50%.) Which begged the question, why would propane prices be so strong in 2020 when in 2019 prices were weak relative to crude?
We answered that question in Part 2. The primary culprit is exports, which as of November were up to 1.3 MMb/d from only 0.6 MMb/d in 2015. Actually, propane exports now exceed average U.S. domestic demand, even in the winter season — an extraordinary thing, when you think about it. We then explored the relationship between total demand (domestic plus exports), inventories, and prices. Bottom line: with exports so high, it just takes more inventory in the ground to keep the system running smoothly during the winter. That level of inventory can be measured by calculating average days-supply (i.e., inventories divided by demand) and including both domestic and export demand in the equation. In our calculation of that statistic, it showed that average days-supply has been skating along the bottom of the five-year range for the past few weeks. And when the market perceives that stocks might be getting tight, prices increase.
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