Prices for non-TET propane at Mont Belvieu yesterday fell to their lowest level in 13 years at 31.0 cnts/Gal (source: OPIS). A big part of the recent price decline is to do with surging propane storage inventory. Last Wednesday’s data from the Energy Information Administration (EIA) showed U.S. propane inventory levels increased by 3.8 MMBbl to 77MMBbl during the last week of May 2015. If storage injections increase at that rate for another couple of weeks then levels will surpass the record of 81.6 MMBbl set in October 2014. The trouble is – that record was set at the start of winter – traditionally the end of propane storage build season - but we are still only in June – with several months of storage build left. Today we discuss the growing propane surplus.
We began this series last week by looking at the Edmonton propane market where prices dropped into negative territory in the face of unprecedented oversupply (see The Great Edmonton Propane Giveaway). The western Canadian surplus follows lower seasonal crop drying and home heating demand than usual for propane in their traditional markets in the U.S. Midwest and Northeast. That lack of demand was compounded by the reversal of the Cochin pipeline in 2014 that previously shipped up to 50 Mb/d of Canadian propane to the Midwest. Until new rail terminals and storage capacity are built in the Edmonton region, natural gas liquid (NGL) producers are stuck scrambling to find local storage capacity or paying additional rail freight charges to ship their propane to U.S. storage hubs around the country at spots like Hattiesburg, Mississippi, Arizona (See Been Through The Desert), at Conway, KS in the Midwest, Mont Belvieu on the Gulf Coast or just about any location that will take the stuff. The trouble is that supplies are just as abundant in the U.S. as they are in Edmonton this year and so there is no “room at the inn” for much of the surplus Canadian propane in the Lower 48. This time we turn our focus to the worsening U.S. propane supply glut.
The current propane oversupply in part reflects the fact that U.S. demand is quite seasonal - with about 30% of annual use coming during the fall and winter months from residential and commercial heating as well as agricultural crop drying (see Farmer Dries Corn Part 1 and Part 2). Since peak seasonal demand cannot easily be met from production, propane is injected into storage during the summer months to build up adequate supplies (see Carbon Rich Value High). However a surge in NGL plant production from “wet” shale gas basins in the past few years (up 54% between 2011 and 2014 to 970 Mb/d and averaging 1070 Mb/d through March 2015 – source EIA) has increased the supply of propane (that typically represents about 28% by volume of the NGL barrel) way beyond existing domestic demand levels – creating a growing surplus looking for a new home. Since new domestic demand for propane – largely from petrochemical plants - requires lengthy infrastructure investment, it has fallen to the export market to soak up surplus supplies (see Sail Away). The problem is that export demand for propane has proven to be quite volatile – with high demand during the winter of 2013/14 contributing to a shortage of propane to meet seasonal demand in the Midwest (see A Perfect Storm) and a fall in export demand since February 2015 threatening to create a huge surplus this year – overwhelming seasonal storage capacity.