What Are the Biggest Supply Concerns for 2024-2025?

In midsummer on July 19, this year’s United States propane inventory stood at 84.5 million barrels (MMbbl), 1.2 MMbbl below the level recorded at the same time in 2023. Production was up 75,000 barrels per day (bbld) compared to the same week in 2023 and increased 260,000 bbld compared to two years earlier. On July 19, the four-week production average, 2.689 MMbbld, was 148,000 bbld above a year ago. The U.S. propane exports four-week average of 1.614 MMbbld was 97,000 bbld greater than a year ago.

BPN spoke to several longtime propane industry supply experts to get their thoughts on challenges and opportunities retail propane marketers face during the coming 2024-2025 winter.

“With production strong and exports pretty much maxed out, it is hard to say the U.S. will run out of propane during the winter of 2024-2025,” said D.D. Alexander, president of Global Gas Inc. and vice chair of the National Propane Gas Association (NPGA). “However, as always, the issue comes down to having the propane where and when we need it. We know that exports have been running strong for the year, although we have had lower exports in July due to the hurricane in the Gulf.”

She noted the arbitrage to Europe and Asia is strong, [so] as much product that can be exported will be exported.

“With expansion for export capacity — that is now ongoing — we know that it will not be operational until 2025 and on,” said Alexander. “This should all lead to having ample inventories for the domestic market in the U.S. for this winter. But wait. … Will it be in the region we need it? The answer to that is currently unknown. We know right now we have plenty of inventory in Petroleum Administration for Defense Districts [PADD] 1 and 2, but until we see winter show up, we don’t know. It all depends on where Old Man Winter shows up, for how long and to what degree.

“As I have always said, the propane industry is very good at moving assets and resources to where we need them,” Alexander continued. “But we never know ahead of time if we can sustain that movement to cover high demand and for how long.”

She said her biggest concern is that the industry has gotten complacent with the three warm winters we have experienced back to back.

“If marketers have not contracted the propane they have in the past, kept up loyal relationships with suppliers and transporters, and prepared themselves for winter, we may see regional logistical issues, especially if we get a [severe] winter,” said Alexander.

Anne Keller, managing director at Midstream Energy Group, believes that given the current situation, the probability of a major draw — at least at the primary supply points — overall should be lower than usual.

“Even record-high levels of exports haven’t made much of a difference to the high builds,” she said. “Primary exposure would be weather disruptions versus market conditions. As of late July, hurricane season has two months to run in Houston, with the worst storms usually showing up in September. We’ve also seen some extreme winter weather in the not-too-distant past that has disrupted the supply chain.”

“I’m not really too concerned about overall U.S. inventory,” said Jeff Thompson, supply consultant at Propane Resources. “I think we still have a decent shot at seeing 95 million to 100 million barrels as we head into heating season. Production is great. Natural gas processors have every incentive to process and extract as much propane as possible from the natural gas stream. With natural gas priced at $2.00 mmBtu [million British thermal units], it doesn’t take much math to see processors are making healthy margins in the natural gas liquids [NGL] segment. Granted, $2.00 natural gas is Henry Hub-priced. Some natural gas is more expensive, some less expensive; still, using $2.00 as a reference suggests processors are not going to be stopping anytime soon.”

Phil Farris, director of wholesale marketing at 3Eight Energy, noted that prior to 2014, there were many instances of 50 MMbbl or larger winter drawdowns.

“Is a fluctuation like that still possible? We could still have 15 weeks of build season. If we do start the winter with over 100 MMbbl, it’s hard to imagine any inventory issues.”

Farris mentioned key ingredients — production, exports, domestic demand — would have to change from their current trend/direction.

“Production levels are high and seem to be consistent,” said Farris. “Low prices are feeding export growth, which many feel is maxed out. Predictions are for a La Niña winter, which is usually warmer and drier in the Southern U.S. It’s hard to foresee a major inventory draw unless one or more of these factors change the trend. Anything is possible in the next five to six months. Transportation and distribution could be another matter.”

What Are Some Regional Concerns to Note?

BPN asked the experts about regional concerns they may have as winter approaches.

“Typically, the sections of the U.S. that are most vulnerable to supply challenges are the areas of the cold regions of the U.S. and the regions furthest from supply hubs,” Alexander said. “If you are a marketer in central Kansas, located by Conway, or a marketer in Maine, you will have very different supply issues. The further you are from a supply hub, the more storage you should have and the more important it is to contract a bigger percentage of your propane requirements.”

“PADD 2 — the Midwest — is always where I have concerns as we head into heating season,” Thompson said. “Any significant demand is going to impact PADD 2 inventories. PADD 3 — the Gulf Coast — is traded like an export market, which it is. Traders have an incentive to try and hold PADD 3 prices to create greater export opportunities. PADD 2 is much more our domestic consumption hub and pricing indicator.”

Thompson said if he has to consistently look at a hub with significant volatility potential, it is the Midwest.

“Early and steady grain drying rolling into a cool and colder early winter could set the stage for a strong move up in Midwest pricing,” Thompson said. “No crop drying, no weather, and PADD 2 prices will continue to trade sideways.”

Generally speaking, Thompson believes if there is an issue with prices in PADD 2, it will be after the new year and likely late January or February.

“Once the trading community and wholesale community realize it cannot outrun the season or weather, then prices could make a larger move higher,” Thompson said.

“The Southeast doesn’t appear vulnerable to any serious, extended supply challenges this year,” Farris said. “I would guess this assessment holds for other regions as well. If you exclude export capacity and takeaway, not much has changed or been upgraded in the distribution system in the past decade … which tells you where the focus is.

“So, what do suppliers and retailers prepare for? A winter like ‘we used to get’ … or like the past 10 years? Staging and holding massive inventory in every region just in case it gets cold is not practical or profitable,” Farris continued. “Inconsistent winter demand has forced the industry to be more willing to react than to prepare, and historically it usually reacts well.

“Most independents have increased their customer count at a staggering rate over the past 10 years. Without a ‘normal’ winter, it’s hard for a retailer to translate that into actual gallons delivered until we see another sustained period of cold. This surge of demand always seems to catch everyone by surprise.”

Factors Regarding the Israel-Hamas & Russia-Ukraine Wars

“Propane is tracking crude, so if crude prices increase, so will propane,” Alexander said. “We need to keep an eye on the events going on in the world because all of it affects us directly or indirectly. If the Russia-Ukraine war ends, this could bring more Russian oil onto the market. If it continues, we could see natural gas shortages in Europe, especially if Europe gets a cold winter.”

Keller said a wild card scenario is that one of these wars will be settled ahead of the elections.

“Anything can happen this year! Even if not, sanctions seem to have just rearranged the routes for suppliers and buyers instead of doing lasting damage to specific economies,” she said. “Even with a change in Washington, D.C., there won’t be a lot of winter left to affect via policy changes such as reimposition of export tariffs on propane to China.”

She noted consumer debt levels are rising, and concerns about inflation and rising unemployment levels could signal a recession, which would affect both demand and prices.

“Again, risks seem more related to physical disruptions as opposed to supply/demand factors this year,”  said Keller.

“We always have to watch the market for geopolitical events,” Thompson said. “Unfortunately for us, by the time we know, the move is already happening or happened.”

“Both situations continue with no resolution in sight,” said Farris. “Neither appears likely to have a direct effect on a propane dealer in the U.S. But the possibility of widespread escalation in the Middle East would have an impact on markets, especially crude oil … which could affect NGL prices everywhere.”

What Factors Should Be Considered During a Presidential Election Year?

“I think a bigger political event than geopolitical events this year — and this gets into the psychology of the market — is the U.S. presidential election,” Thompson said. “The markets are not excited to move higher or move lower right now. It seems traders are content to let propane, crude, motor gas and heating oil all trade in a price band/sideways market.”

Thompson said traders don’t want to get long, but fear being short.

“It’s like they are buying time to see who is going to be elected. This could make for a fairly quiet late summer and early fall. Looking at the current situation, it is hard to get an accurate perspective on market direction. … Add in [the Federal Reserve] fiscal policy and it gets a whole lot messier making assumptions about market direction.”

Alexander pointed out that during the Republican National Convention, Trump highlighted a return to drilling as a priority.

“If Trump is elected, we will see a lot more confidence in the producer segment of our industry, and hopefully, a lot less regulations and proposed regulations regarding production all the way down to the customers’ stove,” Alexander said.

Alexander believes with fewer proposed bans on propane, NPGA and its members can spend less time on litigation and more time promoting and selling propane.

How Much Coverage Should a Retailer Put in Place? What About Future Winters?

BPN noted propane prices have ranged from 30 cents per gallon (cpg) to 190 cpg during the past 20 years and asked if it is a good idea to cover more than the gallons you will likely sell at a fixed cost with prices at current levels, and if it makes sense to cover any gallons for 2025-2026 or 2026-2027.

“We told our customers if the crude/propane spread gets to 35% or less, that would be a good time to buy,” Alexander said. “It did get there, and many retailers took advantage of that. It since has been running around 42% of crude, which still is relatively good. Again, I always say buy what you sell and sell what you buy. Meaning, don’t speculate! If you have customers who want to cover gas for 2025-2026, then by all means, cover it. However, I would not be out speculating as a retailer unless you have a lot of tolerance for risk.”

“If we continue to see signs of a slowdown in the U.S. economy, ‘pay as you go’ would work this winter, with some safety cover in regions where winter demand is a wild card,” Keller said. “Locking in prices for winter 2025-2026 — and in particular 2026-2027 — should be a good move. This is because there are increasing questions around whether U.S. supply growth will be as robust as it has been recently.”

“The short answer is yes,” Thompson said. “It almost always makes sense to cover gallons for two and three years out. I work with a retailer who consistently hedges two and three years out and consistently makes or exceeds his budgeted gross margins.”

Thompson outlined two things a retailer needs to do. “First, stop looking at opportunity lost or gained. Second, build a plan and stick to the plan. Stop second guessing and follow the plan.”

Thompson said a critical step is to recognize that changing the plan mid-season is generally an idea better left alone. “This gets to opportunity lost or gained. A retailer’s goal should be to make or exceed budget year in/year out.”

“As we move into late summer, we are just under 80 cpg, which over the past 20 years is about as normal as you can get,” Farris said. “Retail margins are very good in most areas. Do you contract and lock in ‘very good’ … or go with the market and hope for ‘incredible’ … and then risk having to accept ‘so-so’? It’s a personal risk decision.

“Going back to the current inventory situation … when we start talking 100 MMbbls in the U.S., the market tends to react — usually downward — to around 50 cpg to 60 cpg,” Farris continued. “More retailers are hedging two to three years out now. That makes sense based on the margin comments and not knowing what market influences will be in two to three years.”

Final Thoughts on Supply Planning for 2024-2025

“The industry as a whole has fewer gallons contracted this year,” Alexander said. “If we get any weather at all, I worry what will happen. Make sure you have your necessary volumes contracted. Many suppliers like us will contract winter-only volumes. If you have not contracted for your winter volumes, I suggest you do.”

“Since we were sitting right under the eye of the storm here in the Houston area this time, this is a good chance for the industry to reinforce the idea of self-sufficiency,” Keller said. “[The Federal Emergency Management Agency] covered the cost of a backup generator for people who bought one during the storm, and many of these units run on natural gas or propane. Even in metro regions that are primarily grid-powered, it’s reassuring to be able to keep food cold and be able to cook no matter what. It also doesn’t deteriorate in storage like gasoline. Propane is ‘there when you need it.’”

“Physical supply is fairly easy,” Thompson said. “There will always be some company or wholesaler willing to sell you propane. The key is building and establishing a relationship with a wholesaler who puts your interests before [theirs] — that is how you will grow your business.”

“Most are familiar with basic preparation in this industry,” Farris said. “Tanks full, equipment and employees ready, communication with transportation and gas providers. It gets a little fuzzy after that. How do you prepare for issues that don’t come up every year … or happen every 10 years? Do you just react when the time comes … and pay up?

“Again, for most it’s been 10 years since a ‘real’ winter,” Farris said. “Most conversation now centers around warm winters, low prices, plenty of inventory, great margins — no issues. Today’s environment makes it easy to get complacent. More business gets done indirectly — text, e-mail … a lot of it is on autopilot.

“Retail margins are very good,” added Farris. “How do you reinvest the money in your livelihood? A new showroom, a new truck, tanks — that’s easy. It may be ‘old school,’ but relationships are critical when things get messy. And solid relationships are one of the best investments you can make.

“The propane supply and transportation landscape is always evolving,” Farris continued. “Understand the objective and motive of companies you do business with and where you fit in. Are you a good customer or just a customer? Do you know? What does it take to be the best customer? You’d be surprised. Make yourself important — that’s preparation.”

Farris concluded, “As somebody once said: ‘If you stay ready, you ain’t gotta get ready!’”