The recent propane shortage is being called a “crisis” and for good reason. But like so many “crises” there is more to the story than is generally known and in this case it’s worth a careful examination of the events involved. Clearly it was a perfect storm in the balance of supply and demand, resulting in huge price spikes. And the consequences included panic, headline news, government intervention and of course, lots of finger pointing. Today we look at how the market responded and why the propane industry will once again be stronger for it.
What Happened?
Our recent blog titled A Perfect Storm – Polar Vortex Turns Propane and other NGL Markets Upside Down was posted in the depths of the crisis as the price for propane in Conway, KS peaked near $5.00/Gallon. That was an all-time record for the price of propane in the U.S. and the most obvious indication of severe supply shortages in the Midwest propane market. There were three primary factors identified as responsible for the crisis in our blog: (1) a late, wet, bumper crop of corn requiring large volumes of propane for grain drying, (2) lower inventories due to so many barrels being moved south to the Gulf Coast for exports (see Sail Away - Propane Exports Exceed 400 Mb/d), and by far the most important factor (3) frigid, polar-vortex weather. It turns out that there were other factors at work as well. Cochin pipeline, being taken out of propane service so that it can be used to supply diluent to Canadian crude oil producers had a temporary outage that took supply out of the market. A major natural gas processing plant in the area was off-line due to expansion work, taking more supply out of the market. Rail lines were crowded, and there was a shortage of transport truck drivers.
The result was the rollercoaster markets in Conway shown in the left graph in Figure 1 below. Essentially the crisis began in mid-December 2013, peaked on January 24, 2014, and quickly subsided over the next few days. Since early February the price of Conway propane has returned to pre-crisis levels. In Mont Belvieu (right graph, Figure 1) there was no crisis, but the price of propane did move up quickly from the $1.20-$1.30/gallon range up to almost $1.75/gallon as Mont Belvieu supplies were diverted (rail shipments, curtailed pipeline deliveries, etc.) to help meet Midwest and Northeast requirements. As those requirements were met, over the past few days Mont Belvieu prices have also moved back down to pre-crisis ranges. Since prices have now declined, we can say that the market worked -- over time. However, in the throes of the crisis just a few weeks back, clearly there were things that were not working as they should have.
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