With Propane Supply at Record Highs, Exports & Supply Disruptions Remain Concerns for 2023-2024

As 2023 reached the midyear point, there were 81.1 million barrels (MMbbld) of propane in United States inventory, up a full 47.7% from a year ago. With prices near the low end of the 30 cents per gallon (cpg) to 190 cpg prices we’ve seen in recent years, BPN spoke to propane supply experts about what supply level concerns they have as exports continue to set new records with winter 2023-2024 drawing closer.

Effects of Exports

“I’m not seeing a reason for concern this year,” said Anne Keller, managing director at Midstream Energy Group. “Even if we have a switch from the warmest to the coldest winter on record, I think we will have challenges with pushing exports much higher on a sustained basis because of dock access and the wait times to get through the Canal for Asia-bound shipments.”

“The United States continues to build inventory well above the five-year average, and we are seeing some healthy storage carries from now until the first quarter of 2024 and beyond, which was not the case last season in which the industry was penalized for storing any product in the field,” said John Powell, senior vice president and head of Crestwood’s team of propane industry professionals. “This change in curve structure has allowed much more inventory to be stored out in the field at storage locations much closer to demand.”

“The industry as a whole is in a very good position going into the crop drying season and the 2023-2024 winter season,” Powell continued. “On the global demand side, the entire industry has been surprised by the lack of demand from the Asian chemical companies. Multiple new propane dehydrogenation plant (PDH) facilities have been coming online in 2023, but not operating at higher levels.”

Powell believes the one fundamental most did not anticipate was the cheaper Russian and Iranian crude and products hitting the market.

“Russia and Iran have been severely discounting their products well below the rest of the world to avoid many of the sanctions in place,” he said. “India and China have been the main buyers of this cheaper product, thus making propane and butane price themselves lower to compete with the other cheaper chemical feedstocks. I would look for this to continue until these sanctions are lifted.”

“Large exports are the only thing that will keep our inventories from becoming so large it creates a problem with storage and keeping production strong,” said D.D. Alexander, president of Global Gas Inc., treasurer of the National Propane Gas Association (NPGA) and past chairman of the NPGA Propane Supply & Logistics Committee. “However, extremely large exports will keep our inventories from building the normal amount.”

Alexander believes strong exports will help manage high inventory levels, but it would take continued larger-than-normal exports to get to winter with smaller-than-normal inventory levels. “Exports need to be in the 1.5 [MMbbld] to 1.6 [MMbbld] range in order to keep inventory from building at an extremely fast pace,” she said. “Exports over 1.7 [MMbbld] will not allow our inventories to build at the normal range.”

She noted additional export space is being planned and built, but there is not much additional space currently. “We all need to keep a careful eye on inventories. They can change direction extremely fast depending on export volumes.”

“The inventory build season for U.S. propane typically runs through summer until about the beginning of November,” said Phil Farris, director of wholesale marketing at 3EightEnergy. “Total propane storage capacity in the U.S. is a fuzzy number. In the past, the ‘full’ discussion usually started around 100 MMbbld, per EIA reports. Primary bulk storage facilities in different PADDs are not linked together, so containment issues can arise in some areas and not be a problem in others.”

Farris noted every week that shows a continual build of 2 to 3 MMbbld pushes closer to this figure. “If we get there and that becomes an issue, something will have to give in the production/export equation … and in the market,” he said. “But things can change fast. I expect a much cooler winter in the South this year and would not be surprised if domestic demand and exports flip the discussion and inventory becomes a concern by first quarter of 2024.”

J.D. Buss, president of Twin Feathers Advisors, said U.S. inventory levels are on pace to easily pass the century mark before true winter demand hits. “Peak inventory of 102 million was reached in the fall of 2020,” Buss said. “Near the middle of June 2023, current levels are running almost 5.5 million above the same time in 2020. What will bring down this strong inventory build? Exports!

“Since February 2022, EIA data shows the average daily exports have been higher than the same month in the prior year,” Buss continued. “The first six months of 2023 have seen exports average over 1.5 MMbbld — the highest six-month average on record. And yet we are still seeing inventory balances reaching record highs.

“If we look at 2020, exports peaked during the Q4 period and acted to quickly drop 26 to 27 MMbbld from U.S. inventory by the end of that year,” Buss said. “Exports will need to remain in the 1.5 to 1.6 MMbbld range to keep inventory from ballooning past the prior record highs. And if we follow the same 2020 pattern, exports will need to seek record highs to draw down excess in the market.”

What does all this mean for domestic North America? Buss said there’s still plenty of propane, and that will likely be the case through much of this winter.

“However, this doesn’t mean prices will be ‘rock bottom’ for the rest of 2023,” Buss said. “International markets can and will clear U.S. propane, but will accomplish that at international prices. There may be some regional discounts due to logistical constraints, but the price landscape across North America should be heavily influenced by global prices.”

Possibilities for Regional US Propane Supply Constraints

Noting there were various regional supply constraints last season, especially in the West, despite plenty of overall inventory, BPN asked the experts what constraints might appear this season.

“Last winter’s supply disruptions in the West were caused by high spot natural gas prices on the West Coast and rail disruptions,” Alexander said. “I believe rail disruptions will continue to be an issue going forward. The high spot natural gas prices may not be a factor again this year, but it will most likely be something else — possibly somewhere different in the country.”

Alexander noted the West Coast was particularly wet and cold, causing spikes in natural gas. “We always have to adjust to extreme weather in any region of the country. The propane industry is good at this, adjusting our supply and resources where and when we need them.”

“With the economic incentive to store product this year, many of the Western issues should be taken care of this year,” Powell said. “However, weather can still be a huge factor in any region, so supply issues could still exist, especially in those regions that rely more on rail and longer trucking routes.”

“Every year we go without upgraded infrastructure is another year that we risk seeing supply challenges,” said Jeff Thompson, supply consultant at Propane Resources. “With the push and promotion of propane as a clean energy, we will see demands outstrip supply at certain times of the year. This is one reason why it is becoming imperative [to train customers] to fill tanks in the summer and not wait until fall.”

Thompson feels this will do two things. “First, the retailer will earn much-needed allocation from a supply point that has limited capacity. Second, it makes the fall ramp-up into heating season manageable for retailers. The industry has not presented the message of filling in the summer to the customer base that makes the customer want to do it. We need to do a better job of explaining cost, comfort and security to our customer bases.”

“This time, the challenges seem more likely to result from the rapid runup in interest rates,” said Keller. “Although to us ‘long-timers’ a 5% interest rate seems like a joke, it’s a 500% increase from last year and adds to the cost of carrying supply. Customers are more likely to resist topping off their tanks due to financial pressures, as well, if reports of rising credit card debt are accurate.”

“I think the shortage of drivers, particularly Class A, may catch up with us this time,” Farris said. “It’s been lingering for a few years, and the mild 2022-2023 winter diminished the attention and concern. If colder weather is regional, transportation assets can move from one region to another for a few months. That could mitigate some potential trouble this year.”

Positioning Supply for 2023-2024 & Beyond

“The price landscape across the U.S. for much of the second quarter has been a steady move lower,” said Buss. “The propane percentage to crude has drifted into the mid-30% range, and prices per gallon for June will average close to 55 cents per gallon. Winter prices, both for the 2023-2024 winter and beyond, are trading at higher values.”

According to Buss, middle of winter 2023-2024 values have been pricing 7 cpg to 8 cpg higher than the current month while winter prices for 2024-2025 and 2025-2026 have been 9 cpg to 10 cpg above the current market. “This shift to a contango price market (current prices below future) signifies a bearish current market but also provides opportunities to secure stable prices in the future.”

Buss noted that over the prior 15 winters, only four have seen average Mont Belvieu, Texas, prices at or below 65 cents/gallon. “Only two winters (2016-2017 and 2019-2020) have seen averages strongly below 65 cents/gallon. This may provide some guidelines for those seeking price protection both for this coming winter and well into the future.”

Buss feels it is important for retail propane marketers to talk to a trusted advisor to make smart decisions. “Two of the most common questions our company receives are, ‘Will prices get lower?’ and ‘Should we buy now?’ The answer to these questions is, ‘Yes’ and ‘It depends.’ There is no guarantee on prices and they can always go farther up or down. The purchase decision, however, depends on your desire to protect margin and your own personal risk tolerance.”

“Retailers should continue to contract with their suppliers for their supply needs,” Alexander said. “The farther you get away from the supply hubs, the more (higher percentage) you should contract. In the Northeast, for example, I advise our clients to purchase at least 80% of their contract needs. We’ve also seen a lot of pre-buys being purchased for this winter. If you are selling locked-in pricing, you need to cover it.”

Alexander noted propane is relatively low not only in the real price but also relative to crude oil. “It is low relative to crude due to the large propane inventories in the U.S. We are seeing some customers buying for the next two years; however, unless you are selling it as locked-in pricing, you are speculating. I wouldn’t buy/speculate with a large percentage. Don’t take on more risk than you can afford and stomach. Having said that, I do believe the downside risk is much less than the upside risk.”

“This year seems to be all about the crude oil price,” Thompson said. “Traders do not seem to like crude trading under 35% for too long. This suggests we are much closer to the bottom of the price range than we think. There is strong support for propane spot prices in the mid-40s [cents]. [In July], we are only 7 to 10 cents above the strong support. If crude moves higher in the second half of 2023, then we could see propane stay at current levels or move higher even with higher inventories going into winter.”

Thompson said that at $85/bbld and 35% of crude, propane would be trading at 70 cents. “This doesn’t seem out of the question as we move through winter,” he said. “One thing that no one really seems to be talking much about is the level of inventory of … crude oil inventories, motor gasoline and distillates. Right now, the collective feeling is we are not in good shape on these inventories. This could create major headaches for propane as we head into heating season.”

“It made sense to look at the next two years a few months back,” Thompson said. “Now would be the time to focus on next winter and wait a bit for the following two years. With so much economic uncertainty, it is hard to look past the next 12 months. There is value in 80 cpg or less propane in winter 2024-2025, but a significant slowdown in the economy could see values drop back into the 60s [cents]. The real question a retailer should be asking is, ‘Can I live with a move down of 10 cpg to 15 cpg against my inventory cost and still make money?’ If the answer is yes, then do it.”

“Continue to review your winter plans, particularly in logistically challenged areas of the country, to ensure you have plenty of supply alternatives,” Powell said. “Most importantly, keep your customers full going into the winter season and take full advantage of the storage carries in the field to keep customers full, especially two to three weeks prior to any anticipated colder weather/demand you see in the future.”

With prices in the low range of the 30 cpg to 190 cpg range we’ve seen over the past 20 years, does it make sense to be positioning product for several years in advance? “Every retailer understands their customers best, so if customers would like to lock in lower prices, then now is a good opportunity to offer customers long-dated pricing,” said Powell. “Just remember that future years are more expensive than this year right now, so your marketing will be key to many of your customers.”

“If they are in a financial position to do so, this would seem to be a great year to add/expand storage in remote areas as insurance against power outages, bad weather and/or fires,” Keller said. “Supply is cheap relative to crude, inventories are high and the forward curve covers a lot of the carry cost, unlike with crude. It’s a great time to buy and store for the future. It’s looking like grid reliability isn’t going to get better, with 72-week wait times for transformers and more solar and wind waiting to be connected.”

“Unless you’re the gambling type, common sense says you cover any fixed price sales with fixed purchases to assure your profit margin,” Farris said. “The current market might make you feel like rolling the dice, and for good cause. There is plenty of overly bearish data to go around, including crude and gas markets, inventories, global economies and just bad political news in general.”

Farris said the forward markets aren’t at historical lows, but they are definitely lower than any short- or long-term average market price. “If margins today are better than they’ve ever been, and you are comfortable as to where your retail price will be in the foreseeable future, a better question is why wouldn’t you buy? And the only answer to that is because you think in the long-term, propane will grind along at the bottom of its historical range. Or less. And that is highly unlikely, as any chart would show. Consider the downside versus the upside.”

Outlook for US Shale Production

Keller noted there’s a big debate going on in the oil and gas community around the outlook for US shale production going forward. “Right now, we’re seeing the rig count fall onshore, and there have been layoffs already in the Permian,” Keller said. “Given that prices don’t seem that low, seeing this happen sends the message that the days of roller coaster booms and busts in US shale are drawing to a close.”

According to Keller, when the price tag for all the new energy ideas is tallied, we will see a lot of pushback on a number of green projects, and oil and gas will be needed for some time to come.

“That doesn’t mean that US oil production will continue to ramp, though. We seem more likely headed for a plateau in US onshore oil production within the next 12 months with a gradual drift down going forward,” Keller said. “The outlook for natural gas is better, since more of the stuff coming out of the ground these days is gas and condensate, but we’re seeing increasing constraints on water disposal and pipeline construction that will slow down the growth curve. NGL supply growth won’t be as strong either, since the amount of associated gas in the supply mix will be falling.”