Tuesday, February 26, 2019
As 2019 began, crude oil was trading around $45/bbl, Mont Belvieu propane was at 65 cents/gal., and Conway propane was at 58 cents/gal. Looking ahead, a contract for propane for delivery in January 2020 or January 2021 was approximately 68 cents/gal. at Mont Belvieu for both years and 65 cents/gal. and 63 cents/gal., respectively, for 2020 and 2021 at Conway. These were not unfavorable price points in a market where many advisors had encouraged locking in some gallons for future years even as out-month prices were higher earlier in the season. Several factors have been bouncing propane prices around during the past year and there are a few factors to watch as we move through 2019. Indeed, prices are down significantly from crude oil topping $70 per barrel and propane more than a dollar per gallon.
The opening of the Mariner East 2 pipeline system on Dec. 29 had been long-awaited. However, its increased exports from the Northeast U.S. have the potential to cut inventories faster and thus boost prices in the U.S. Concerns about Mariner East 2 cutting supplies have been alive ever since the project was announced in November 2014. The 350-mile pipeline from Scio, Ohio to the Marcus Hook industrial complex in Delaware County, Pa. will carry natural gas liquids to Marcus Hook as will Sunoco’s next project, Mariner East 2X. With ethane, butane, and propane moving to Marcus Hook, all three fuels will be shipped overseas to make plastics.
Overall, Mariner East 2 represents 300,000 bbld to 450,000 bbld of added volume in exports. When Mariner East 2X is complete, a full 500,000 bbld to 750,000 bbld of propane exports could leave the U.S.
The project was almost two years behind schedule when it opened late last year due to delays related to construction and regulatory shutdowns. The venture is still not without challenges as several Chester County and Delaware County residents have requested a complete shutdown of the pipeline citing public safety concerns. A Chester County district attorney has opened a criminal investigation into the project.
Of course, crude oil prices play a major role in the price of propane. With exports not moving out of the U.S. at quite the dramatic rate seen previously, and limited supply issues, propane has recently traded at a lower percentage to crude oil. Nonetheless, crude oil prices are a factor, having reached four-year highs in October only to fall 39% to levels not seen since mid-2017. Crude was in the mid-$40s on both occasions. It should be noted that crude oil had an 80% increase after the mid-2017 pullback. With the Organization of Petroleum Exporting Countries (OPEC) having its largest production drop in two years in December, some believe crude is poised for another push upward, though it may not necessarily gain 80% this time.
With a sharp move down at the end of 2018, oil prices averaged $68/bbl in 2018, 30% higher than the average price in 2017. According to the World Bank in its January 2019 Global Economic Prospects report, oil prices are expected to average $67/bbl in 2019 and 2020. The World Bank expects oil demand growth to continue strong but expects a slowdown in emerging-market and developing economies “could have a greater impact on oil demand than expected.” In the second half of 2019, it believes OPEC decisions about production levels will weigh heavily on where oil prices may go.
Other factors to watch include the impact of U.S. sanctions on Iran, production levels in Venezuela, which have declined considerably, and crude oil output in the U.S., which is expected to increase by another 1 MMbbld in 2019. In late December, U.S. oil production was 11.6 MMbbld, just below the 11.7-MMbbld record. This will help offset the expected cuts of 1.2 MMbbld by OPEC and allies earlier in December. OPEC is expected to lose market share in 2019, declining from 33% of crude in 2018 to 31% of crude.
Amid the uncertainty, it is in doubt just where propane prices are going. Nonetheless, it may be a good time to layer in some product for 2019-2020 and even 2020-2021. With small percentages in place for future years, a decent margin can still be guaranteed. There is limited downside but plenty that can push the market higher between now and then. —Pat Thornton
The opening of the Mariner East 2 pipeline system on Dec. 29 had been long-awaited. However, its increased exports from the Northeast U.S. have the potential to cut inventories faster and thus boost prices in the U.S. Concerns about Mariner East 2 cutting supplies have been alive ever since the project was announced in November 2014. The 350-mile pipeline from Scio, Ohio to the Marcus Hook industrial complex in Delaware County, Pa. will carry natural gas liquids to Marcus Hook as will Sunoco’s next project, Mariner East 2X. With ethane, butane, and propane moving to Marcus Hook, all three fuels will be shipped overseas to make plastics.
Overall, Mariner East 2 represents 300,000 bbld to 450,000 bbld of added volume in exports. When Mariner East 2X is complete, a full 500,000 bbld to 750,000 bbld of propane exports could leave the U.S.
The project was almost two years behind schedule when it opened late last year due to delays related to construction and regulatory shutdowns. The venture is still not without challenges as several Chester County and Delaware County residents have requested a complete shutdown of the pipeline citing public safety concerns. A Chester County district attorney has opened a criminal investigation into the project.
Of course, crude oil prices play a major role in the price of propane. With exports not moving out of the U.S. at quite the dramatic rate seen previously, and limited supply issues, propane has recently traded at a lower percentage to crude oil. Nonetheless, crude oil prices are a factor, having reached four-year highs in October only to fall 39% to levels not seen since mid-2017. Crude was in the mid-$40s on both occasions. It should be noted that crude oil had an 80% increase after the mid-2017 pullback. With the Organization of Petroleum Exporting Countries (OPEC) having its largest production drop in two years in December, some believe crude is poised for another push upward, though it may not necessarily gain 80% this time.
With a sharp move down at the end of 2018, oil prices averaged $68/bbl in 2018, 30% higher than the average price in 2017. According to the World Bank in its January 2019 Global Economic Prospects report, oil prices are expected to average $67/bbl in 2019 and 2020. The World Bank expects oil demand growth to continue strong but expects a slowdown in emerging-market and developing economies “could have a greater impact on oil demand than expected.” In the second half of 2019, it believes OPEC decisions about production levels will weigh heavily on where oil prices may go.
Other factors to watch include the impact of U.S. sanctions on Iran, production levels in Venezuela, which have declined considerably, and crude oil output in the U.S., which is expected to increase by another 1 MMbbld in 2019. In late December, U.S. oil production was 11.6 MMbbld, just below the 11.7-MMbbld record. This will help offset the expected cuts of 1.2 MMbbld by OPEC and allies earlier in December. OPEC is expected to lose market share in 2019, declining from 33% of crude in 2018 to 31% of crude.
Amid the uncertainty, it is in doubt just where propane prices are going. Nonetheless, it may be a good time to layer in some product for 2019-2020 and even 2020-2021. With small percentages in place for future years, a decent margin can still be guaranteed. There is limited downside but plenty that can push the market higher between now and then. —Pat Thornton
