Next to You: A Transformation in Propane Markets

Much More Supply near Demand Regions: Opportunities and Challenges

report coverFrom a position as a net propane importer just a few years ago, the U.S. now produces almost twice as much propane as is consumed in the country. The balance moves to global markets, with export volumes doubling over the past two years. The result has been a transformation in the dynamics of the market to the benefit of the domestic propane industry. Much of that supply growth is coming from the Northeast and Midwest, location of almost 80% of total consumer propane demand in the U.S. – residential/commercial, industrial, motor fuel, and agricultural demand. The location of that production to nearby markets has significantly improved supply reliability, as have huge investments that the industry has made in transportation infrastructure – both pipeline and rail – to move those barrels to market.

Consequently the U.S. propane industry is now in a much better position to handle a “Perfect Storm” of extreme demand events than it was in the winter of 2013-14 when the propane market was roiled by critically low inventory levels in the Midwest with dramatic consequences for prices. But even though all of the new production makes such events much less likely in the future, the transformation in propane markets over the past two years brings with it a number of challenges, including greater exposure of domestic propane to global markets, more complex inter-regional supply dynamics, a more diverse supply chain, all in the context of limited domestic demand growth.

In an effort to assess how these market developments could impact the prospects for disruptions similar to those that occurred during the “Perfect Storm” winter, the Propane Education and Research Council (PERC) earlier this year contracted with RBN Energy to assess market developments that could affect the prospects for future propane-supply disruptions, and to suggest actions to alleviate the risk of such market turmoil. This report summarizes some of RBN’s analysis and conclusions from the PERC study.

Key take-aways from the report include:

  • U.S. propane production from gas processing has more than doubled, driving export growth and increasing price exposure to global markets
  • Much of the new supply is closer to Northeast and Midwest propane demand centers, improving local access
  • Domestic propane demand will remain flat, but spiking demand during ‘perfect storm’ winter events could challenge propane delivery networks
  • New pipelines, rail facilities, storage and export terminals are being added, making propane markets more interconnected, flexible and resilient
  • Increasingly, volumes from new propane producing regions are transported by rail; new rail facilities are coming on line; rail can be less ratable than pipeline deliveries
  • New infrastructure will enable regional propane shortfalls to be mitigated by rail deliveries, inter-regional flows and temporary cuts in exports
  • Despite the new propane plenty, propane retailers must remain vigilant, and take steps to ensure an efficient and reliable supply chain

Next to You: A Transformation in Propane Markets is the eigth of RBN Energy’s Drill Down report series, a suite of twelve reports coming from RBN during 2015 covering many of the key issues expected to impact the markets for crude oil, natural gas and natural gas liquids.

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