Inevitable Winter Surprises Necessitate Proper Supply Planning, Preparations

By John Powell… Winter is the season of surprises, and in the propane business those unexpected cold blasts or heat waves, along with sudden turns in the market, can create opportunities—or headaches.

Looking ahead to the winter of 2018-2019, the one sure thing is that we will again face surprises. Now is a good time for marketers to evaluate their yearly supply plan and make last-minute adjustments for this winter. Planning ahead is the way to minimize risk and capture good cash flows, even amid surprises.

After two mild winters, the early weeks of 2018 socked the Upper Midwest, Northeast, and even Southern states with frigid temperatures. The nation had a polar vortex, two-foot snows, and a string of nor’easters and wintry “bomb cyclones” that stretched into April. Propane distributors scrambled to meet customers’ needs.

“At the beginning of January we got hit with a cold spell, and snow to go along with it, that was unprecedented in my memory,” said a retailer in a coastal area of New England. “We were calling everybody we could think of to find more propane. For the most part, propane was available. The problem we had was with transportation.”

The owner of a three-state distributor in the Mid-Atlantic said having ample storage, his own transports, and a diverse supply chain kept customers supplied. “Gas can become very thin, very rapidly. Rail infrastructure can get tied up. Weather can put a strain on trucking. The big challenge for us was getting enough hours from our retail drivers during the two weeks when temperatures didn’t get above zero. So the human factor with drivers was the bottleneck.”

To prepare for future surprises, consider ideas from Crestwood’s customers and logistics team:

Knowing your own business is the starting point for supply planning. How to do it:

• Study your customer base. The demand side is all about your customers. A good supply plan starts with a systematic analysis of who your customers are, the gallons they buy, purchase behaviors such as timing, sensitivity to price or weather, and trends in your local economy.

The goal is to match gallons to demand as the season progresses. Contracting purchases to cover customer commitments under level-pay or budget plans is one strategy, and you can add multiple supply contracts through the year as more customers sign on.

• Use long-term local weather data. Some El Niño-watchers are expecting a cold, stormy winter for 2018-2019 in the Upper Midwest and East, though forecasting in advance is hard. But it would also be risky to go light based on one or two mild winters in recent years.

Base your plan on a good set of assumptions with long-term data, such as heating degree-days over five or 10 years. Focus on your local market, and make comparisons to your sales records. You may want to create a range of expectations for the upcoming season.

• Develop a margin for contingencies. Buy propane as part of a planned, proactive process rather than just reacting to spot prices. Build in enough capacity to keep your consumers supplied if 2018-2019 turns out to be a harsh winter. Consider adding more local storage or trucks if needed.

Armed with data on customers’ needs, spend time with suppliers planning for your market:

• Diversify your supply points. Your annual supply plan is like a portfolio of stocks. When the storms come, you don’t want to be caught with all your eggs in one basket.

“I like to make sure I’m using suppliers that offer different supply points and sources, so if one gets in trouble or has issues getting delivery of product, we have backups at different locations,” said a dealer in New York’s Hudson River Valley. “It may cost a few cents more, but having gas when you need it is worth a few cents. It gives you peace of mind.”

• Pay attention to allocations. After mild winters, retailers may be inclined to loosen up on securing allocations from suppliers—but be careful.

“The phones were ringing off the hook this summer, with suppliers offering cheap gas. It’s tempting to load up, but they’re summer gallons with no winter allocation. What matters is whether suppliers will come through in the winter,” a marketer noted, adding that saving a few cents a gallon but missing out on winter allocations is penny-wise and pound-foolish.

• Cultivate supplier relationships. Retailers who buy on a schedule, plan ahead, and enter into supply agreements are building equity with their wholesalers.

“In the middle of winter, you can’t blame suppliers for putting priority on customers who earned allocations and contracted supply,” one retailer said. “Of course, loyalty is a two-way street. If we work with a supplier, we expect them to come through when we need it.”

• Focus on trucking. In peak periods, trucking is the first link in the supply chain to break. Having enough transports and bobtails, staffing up with qualified drivers, and choosing the right supply points keep deliveries—and profits—on track.

“When we work with Crestwood’s terminal in Montgomery, N.Y., not only is it the closest rail supply point, it is also a large enough facility that they can load trucks in a fast amount of time, so that I don’t have to be burdened with trucks waiting in line. Our drivers can get in and out, and turn more loads,” one customer said.

While your business is local, energy is global. The big picture is a complicated mix of “macro” forces that influence your propane supply.

Prices that you and your customers pay are a result of conflicting factors, including a domestic surplus created by increasing production out of the Bakken, Permian, and Powder River Basin—and growing exports to Asia and other regions, now about half of U.S. propane production, competing with domestic consumption and contributing to price spikes.

In the highly connected energy world, a portfolio of options keeps you nimble. For example, when the price spread between propane moving through Conway, Kan. expanded to about 20 cents/gal. below Mont Belvieu, Texas (an export hub), some retailers captured a price advantage by reaching out to supply points with connections to Conway.

To follow changes throughout the supply chain, keep an eye on industry news sources. Your suppliers can also add value with a consultative relationship—the latest market intelligence from their connections and insights into what is coming your way.

John Powell is senior vice president and CCO for Crestwood Midstream’s Marketing Supply & Logistics (MSL) Group. He can be reached at

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