Propane in the News
- Propane prices top in October
- Propane options are a way to hedge a first quarter bounce
- Winter weather has been elusive in December
- Geopolitical factors becoming more important for natural gas prices
Sincerely,
Elaine Levin, President
Powerhouse
(202) 333-5380
The Matrix
In 1998, economic crises hit the fast-growing countries of eastern Asia. OPEC’s response was not aggressive enough, and oil prices hit a low of $9.98. The Economist ran the headline, “Drowning in Oil.” The accompanying story made the call for crude oil to go as low as $5 per barrel. This never happened and the market subsequently rallied.
It is not uncommon for an extreme price move to end right as the media picks it up. There is even a name for it, the cover curse. While not on the front page, the Wall Street Journal ran an article on Oct. 26 titled,” Prepare for Propane Sticker Shock.” Given that propane is not a highly reported commodity in the mainstream press, the contrarians should have taken note. The article was published near the top of a bull run started in back 2020 at $0.3 a gallon.
Propane stocks were low as we approached winter. Prices of petroleum and natural gas were moving higher. In early October, the Mont Belvieu propane price topped out at nearly $1.51 per gallon. By December, propane had lost one-third of its value as prices fell to just under $1. What happened to turn the tide so quickly?
The announcement of the Omicron variant hit all energy markets hard. A mild start to winter also contributed. There are concerns about feedstock in demand in Asia. In China, Jiangsu Sailboat Petrochemical’s new 700,000 mt/year propane dehydrogenation plant announced a delay to its start date from December to sometime in the first quarter of 2022. In the U.S., production of propane and propylene has been growing. The EIA reported a new 4-week average production record at 2.439 million barrels per day.
The historical seasonal pattern for propane was also working against the bulls. It is not uncommon for propane to see a price top in October before softening into the remainder of the year.
Annual Propane Price Seasonality 10 -year Trend Analysis – 2010-2019 Source: POWERHOUSE, CME
So, does this mean winter is over for the propane prices? The seasonal chart suggests there could still be a jump in prices during the first quarter of 2022. Given the historically low inventory, it would not take much weather to excite the bulls.
Hedgers should consider adding options to the buying mix. Call options act as insurance again higher prices. Just like insurance, buyers pay a premium. If the downtrend in prices persists, the call buyer would see the option’s value disappear. However, they would receive the offset of buying physical propane cheaper. Alternatively, if it gets cold and prices jump, the call would offset the higher price you pay your supplier.
One complaint about buying options is that the premium can be “expensive.” When the Wall Street Journal warned about higher propane prices, the winter 2022-2023 strip was trading around $1.41. The at-the-money call strip was valued at $0.14 a gallon, giving the buyer protection if the market continued higher without locking in a fixed price. While it is true the buyer had to pay a $0.14 per gallon premium, the market has fallen much more than that. Expensive is a relative term.
Supply/Demand Balances
Supply/demand data in the United States for the week ended Dec. 3, 2021, were released by the Energy Information Administration.
Total commercial stocks of petroleum rose 4.2 million barrels during the week ended Dec. 3, 2021.
Commercial crude oil supplies in the United States decreased by 0.2 million barrels from the previous report week to 432.9 million barrels.
Crude oil inventory changes by PAD District:
PADD 1: Down 1.3 million barrels to 7.8 million barrels
PADD 2: Plus 1.1 million barrels to 114.4 million barrels
PADD 3: Plus 0.7 million barrels to 237.9 million barrels
PADD 4: Plus 0.3 million barrels to 23.9 million barrels
PADD 5: Down 1.2 million barrels to 48.8 million barrels
Cushing, Oklahoma, inventories were up 2.4 million barrels from the previous report week to 30.9 million barrels.
Domestic crude oil production was up 100,000 barrels per day from the previous report week to 11.7 million barrels daily.
Crude oil imports averaged 6.499 million barrels per day, a daily increase of 105,000 barrels. Exports decreased 434,000 barrels daily to 2.270 million barrels per day.
Refineries used 89.8% of capacity; 1 percentage point higher from the previous report week.
Crude oil inputs to refineries increased 154,000 barrels daily; there were 15.785 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, rose 192,000 barrels daily to 16.287 million barrels daily.
Total petroleum product inventories rose 4.4 million barrels from the previous report week.
Gasoline stocks increased 3.9 million barrels from the previous report week; total stocks are 219.3 million barrels million barrels.
Demand for gasoline rose by 167,000 barrels per day to 8.963 million barrels per day.
Total product demand decreased 385,000 barrels daily to 19.837 million barrels per day.
Distillate fuel oil stocks increased 2.7 million barrels from the previous report week; distillate stocks are at 126.6 million barrels. EIA reported national distillate demand at 3.578 million barrels per day during the report week, a decrease of 631,000 barrels daily.
Propane stocks increased 0.6 million barrels from the previous report week; propane stocks are at 73.3 million barrels. The report estimated current demand at 1.615 million barrels per day, a decrease of 58,000 barrels daily from the previous report week.
Natural Gas
Natural gas prices gapped down at the start of last week on continued forecasts of warmer weather. According to the Capital Weather Gang, “The large-scale weather pattern has recently favored warmth across much of the Lower 48 east of the Rocky Mountains. That seems set to continue for some time. Much of December has been dominated by a polar jet stream locked across the northern tier of the United States and into Canada. This is quite far north for the time of year, and in large part thanks to persistently higher pressure over the contiguous United States.”
The selloff was short lived, as prices started to fill the price gap between $3.860 and $4.066. Providing support prices is the ongoing tension between the U.S. and Russia over Ukraine. As Russia’s aggression towards Ukraine intensifies, the Nord Stream 2 pipeline has become leverage.
According to the EIA:
Working gas in storage was 3,505 Bcf as of Friday, Dec. 3, 2021, according to EIA estimates. This represents a net decrease of 59 Bcf from the previous week. Stocks were 356 Bcf less than last year at this time and 90 Bcf below the five-year average of 3,595 Bcf. At 3,505 Bcf, total working gas is within the five-year historical range.
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