Propane Market Flips From Backwardation To CONTANGO

(October 21, 2019) — By J.D. Buss…

In October 2018 we wrote about a “tectonic shift” that had taken place in the propane markets during the last two years. What was that shift? The forward propane price curve changed from a traditional contango market—meaning future prices are higher than current prices—to a backwardated market, where current prices are higher than future prices.
J.D.Buss explains what the contango propane market means when future LPG prices are higher than current prices reports BPN propane industry trusted source for propane news since 1939
Fast-forward to the current situation and we view another shift in the propane forward-price market, where a traditional asset has come back into prominence and a slew of infrastructure plays are helping to give a future view on the propane marketplace.

“Follow the Money!”
The oft-used expression, “follow the money,” can help explain where domestic propane product is moving and the economic value of that move. The Mont Belvieu graph shows a series of propane forward-price curves for several dates during 2019.

As we moved through calendar year 2019 we see that the propane forward-price curve became more and more contango. A traditional contango market has returned for propane!

Reviewing this in more detail, we see that at the first of August the price for the January 2020 Mont Belvieu contract came in at 53.25 cents/gal. while the August 2019 contract was at 44.50 cents/gal. That differential is 8.75 cents/gal. over only five months. If storage costs for a year are 8 cents/gal.—or 0.66 cents/gal. per month—then the five-month cost of storage would equal 3.3 cents/gal.

When we put all that information together, we see how an individual can make money by placing propane into storage:
  1. Price of August 2019 Belvieu contract (8/1/19) = 44.50 cents/gal.
  2. Assumed cost of five months of storage = 3.30 cents/gal.
  3. Total cost of propane in January 2020 = 47.80 cents/gal.
  4. Sale price in January 2020 on 8/1/19 = 53.25 cents/gal.
  5. Difference: = 5.45 cents/gal.
This is a simplified model, but we can see that a company could make almost a 5.5-cent/gal. profit by merely buying the propane on Aug. 1, selling the future January 2020 Belvieu contract on Aug. 1, and then incurring the cost of storage for five months. By “following the money” we can see why it has proven more beneficial to place propane into storage facilities this summer than to sell propane into the current market.

“Storage Still Rules!
For at least a decade, our team has been advocating storage to our client base. Over that same time, we’ve seen reports and recommendations from trade groups that support propane retail firms adding to their storage capacity. The U.S. propane market has also seen a proliferation of tank monitoring systems with one of the express purposes being to optimize stored volumes.

The backwardated markets that took place in 2017 and 2018 were starting to cause doubt that storage would remain a quality asset for the retail market segment. But the reversal of the price curve to contango, plus the growing levels of exports, continue to support storage as a quality investment.

Over the past five-plus years the mantra of “Growing Exports!” has been heard throughout the propane industry. The question, though, remains how this export growth will impact the retail segment of the domestic U.S. market. The graph below helps to show the overall export growth since 2014 forward using EIA data:
J.D.Buss a propane supply expert in OP, Kan explains contango LPG market means when future propane prices are higher than current prices reports BPN propane industrys trusted source for news since 1939
Combining EIA weekly export and product supplied data, we can create a total weekly demand value for propane. Since 2014, we see that exports have been a larger and larger percentage of the overall weekly demand, while the product-supplied segment has become a smaller and smaller percentage of total demand. What was more intriguing is the fact that the linear uptrend of exports crossed over the linear downtrend of product supplied earlier this year. At the present time, both trends have been in place for multiple years and have not shown any signs of reversing.

Why does this trend support storage assets for retailers? Exports are almost a ratable consumption for all 12 months of the year, they move massive volumes in each transaction, and they garner more of the focus from the producing and midstream markets. In order for retailers to continue to facilitate the traditionally low-summer/high-winter demand of their client base, they will need to rely more heavily on their own asset base—of which storage is a huge part—rather than lean on the historical asset base that has served the U.S. market in prior decades.

“Infrastructure Tells All!”
Following is a very brief outline of upcoming infrastructure projects that will impact the propane and broader NGL markets:
  1. Grand Prix pipeline—Targa Resources’ pipeline running from Stack, Texas to Mont Belvieu with a capacity total of 300,000 bbld
  2. Elk Creek pipeline—ONEOK’s pipeline running from the Bakken area to Colorado with a capacity of 400,000 bbld
  3. Arbuckle II pipeline—ONEOK’s pipeline running from Oklahoma to Mont Belvieu with a 500,000-bbld capacity
  4. Enterprise export expansion—a buildout in Q3 2019 of 175,000 bbld and then a projected expansion of another 260,000 bbld in Q3 2020. Total capacity would be approximately 1.1 MMbbld.
  5. Targa export expansion—adding another 130,000 to 140,000 bbl/month of capacity in Q3 2020
  6. Targa fractionation expansion—an additional 320,000 bbld of capacity at Mont Belvieu
  7. Phillips 66 fractionation expansion—an additional 300,000 bbld of capacity at Sweeney, Texas in 2020
JD Buss President Twin Feathers Propane supply consulting firm tells BPN that the PROPANE MARKET has FLIPped FROM BACKWARDATION TO CONTANGO October 2019In this extremely brief list, we see three major factors:
  1. Large amount of investment dollars.
  2. Large amount of new capacity volume—regardless of whether it is pipeline, fractionation, or export.
  3. All these projects point to getting more volumes to the U.S. Gulf Coast region, specifically Texas.
The short version of this section can be summed up with a simple phrase: it is clear more propane production is coming.

A year ago the propane price curve was backwardated, and bullish sentiment had driven prices to increase nearly 300% from the January 2016 low. Fast-forward 12 months, prices have lost almost all of that previous gain and the price curve has flipped back to traditional contango. Exports are not showing any signs of stopping and massive investment dollars are pointing to huge future propane supplies. As the domestic retail demand segment shrinks further into the background, it is becoming vital for retailers to focus on the following:
  1. Gain a better understanding of the influence of global markets on U.S. propane supply and cost.
  2. Gain greater control over their supply chain.

J.D. Buss, CPA and CTA, of Overland Park, Kan.-based Twin Feathers Consulting, has been working with propane clients over the last 10-plus years to devise and implement both hedging and supply strategies. Buss' extensive industry experience includes working at Koch Industries and Enron in risk management and marketing/trading roles. A former small business owner, he brings accounting knowledge and operational experience to the Twin Feathers team and client base. He may be contacted at This email address is being protected from spambots. You need JavaScript enabled to view it..

Spending Decline For Winter Heating Fuels Reported; 15% Decline For Propane

(October 18, 2019) — The Energy Information Administration (EIA) expects that average expenditures for the major home heating fuels will decline for most households this winter compared to last year, owing to warmer forecast temperatures across much of the country. The agency’s Winter Fuels Outlook notes, however, that changes in household heating expenditures vary significantly by both fuel choice and region. For the average household, EIA expects that both natural gas and electricity bills will decline by 1%, fueloil by 4%, and propane by a marked 15%.

WinterWeather 1But in contrast to the national average, EIA forecasts that expenditures will increase for homes that heat with natural gas in the Midwest and South as a result of higher retail natural gas prices. And although the lower average expenditures forecast largely reflect warmer temperatures this winter compared with the winter of 2018-2019, a colder-than-average winter could result, leading to increases in expenditures.

In addition, retail fueloil prices could rise above those forecast because of ongoing uncertainties. For example, there is unpredictability regarding the effect global sulfur restrictions on marine fuels that go into effect in January will have on world distillate fuel markets. In addition, distillate fuel inventories in the Northeast, the main residential fueloil market, are low heading into winter.

Based on the most recent forecast of heating degree days (HDD) from the National Oceanic and Atmospheric Administration (NOAA), EIA expects temperatures for winter 2019-2020 to be warmer than last winter for most of the U.S. On a national-average basis, temperatures last winter were slightly colder than the most recent 10-winter average. HDD are an approximate measure of how cold temperatures are compared with a base temperature—more HDD indicate colder temperatures. On average, EIA expects total HDD for this winter across the nation to be 4% less than last winter. However, the forecast varies among U.S. regions and forecasts range from 7% fewer HDD than last winter in the Midwest to no change in HDD from last winter in the South.

EIA adds that although NOAA forecasts temperatures this winter to be warmer than last year, recent winters provide a reminder that weather can be unpredictable. The winters of 2013-2014 and 2014-2015 were generally colder than normal, but the winters of 2015-2016 and 2016-2017 were much warmer than normal. Recognizing this potential variability, the Winter Fuels Outlook includes scenarios where HDD in all regions are 10% colder or 10% warmer than forecast.

About 5% of all U.S. households use propane as their primary space-heating fuel and many of these are in the Midwest and Northeast. EIA expects these households to spend 15% less on average for heating this winter compared with last winter, but forecast changes in expenditures vary by region. The agency expects that households heating with propane in the Northeast will spend an average of $228, or 12%, less this winter than last winter, a result of prices that are 10% lower and average household consumption that is forecast to be 3% less than last winter. EIA expects households in the Midwest to spend an average of $236, or 17%, less this winter, reflecting average prices that are about 12% lower than last winter and consumption that is down 6%.

Similar to fueloil, changes in wholesale propane prices pass through relatively quickly to retail propane prices and many propane users buy supplies ahead of the winter and refill as needed. When forecasting expenditures, EIA does not account for the fact that propane consumers purchase fuel ahead of its use. EIA assumes consumers pay the prevailing retail price at the time fuel is consumed.

In the 10%-colder-than-forecast scenario, EIA’s expected expenditures for propane are about the same as last winter in the Northeast, with prices that are 16 cents/gal., or 5%, lower than last winter and consumption that is 5% higher. Forecast expenditures in the cold scenario are $108 more than last winter in the Midwest, reflecting prices that are 11 cents/gal., or 6%, higher than last winter and consumption that is up 2%.

In the 10%-warmer-than-forecast scenario, EIA’s forecast expenditures are $486 under last winter in the Northeast, reflecting prices that are 54 cents/gal., or 17%, lower than last winter and consumption that is 11% under. Forecast expenditures are $332 lower than last winter in the Midwest, reflecting prices that are 22 cents/gal., or 12%, lower than last winter and consumption that is 14% lower.

As of Sept. 30, propane spot prices at the Mont Belvieu hub were nearly 60% lower than at the same time in 2018. EIA expects residential propane prices to be lower this winter compared with last winter because of lower crude oil and natural gas prices that feed into weaker prices for retail propane, and because of more abundant propane supplies nationally. EIA’s propane price forecasts reflect inventories that are above average in most regions of the U.S. going into the winter season and U.S. propane production growth that is expected to continue to outpace domestic and international demand growth.

Propane inventories typically build between April and October and begin drawing down in late-September or October when agricultural use rises and temperatures begin to drop. U.S. propane, including propylene, inventories were at 100.6 MMbbl on Sept. 27, which was 15% higher than the five-year average for that time of year. The high U.S. inventories were primarily the result of stocks in the Gulf Coast that stood 23% higher than the five-year average. Further, inventories were well above average in most regions, with the exception of the Midwest, where volumes were closer to the five-year average.

EIA forecasts that U.S. propane production at natural gas plants and refineries will be 12% higher this winter than last winter, total consumption will be 1% higher than last winter, and net exports will be 32% stronger year over year. U.S. consumption and export growth depend on demand for propane as a heating fuel, as a feedstock for petrochemical plants, and as an agricultural fuel. The increases in total consumption and exports are mainly a result of expected growth in the use of propane as a petrochemical feedstock and would be affected by U.S. and global industrial growth. Propane is also used as a fuel for drying agricultural crops, which may contribute to higher-than-forecast Midwest prices if farmers have higher than expected crop-drying demand during the fall harvest.

EIA estimates that U.S. production of propane/propylene was 125,000 bbld, or 6%, higher in the third quarter of 2019 relative to the third quarter of 2018, and propane net exports rose by 85,000 bbld, or 10%, during the same period. Expansion of Enterprise Products Partners’ Houston Ship Channel export facility in the fourth quarter of 2019 could contribute to rising exports in coming quarters.

During this heating season the Northeast region will have an additional source of propane supply when Blackline Midstream reactivates the Providence, R.I. import terminal. In the Northeast, exports leave from the Philadelphia area in the Central Atlantic region, but U.S. imports mostly come into New England.

For its Winter Fuels Outlook, EIA defines the winter season as October through March. The average household winter heating fuel expenditures discussed are a broad measure for comparing recent winters. Fuel expenditures for individual households are highly dependent on the size and energy efficiency of homes and their heating equipment, along with thermostat setting, local weather conditions, and market size.

(SOURCE: The Weekly Propane Newsletter, October 21, 2019, available exclusively by subscription)

Propane Council Donates $5000 To GreenCare for Troops From Trailer Sweepstakes Raffle At GIE+EXPO

WASHINGTON (October 18, 2019) – The Propane Education & Research Council (PERC) has donated $5,000 to Project EverGreen’s GreenCare for Troops program as part of an in-booth promotion conducted during the 2019 GIE+EXPO week for contractors.
 Project EverGreen’s GreenCare for Troops program as part of an in-booth promotion conducted throughout GIE+EXPO week for contractors reports BPN the LPG industry trusted source for news since 1939. Oct 2019
PERC announced the amount after tallying the total number of entries to its in-booth trailer giveaway sweepstakes. On behalf of each contractor who entered the in-booth trailer giveaway sweepstakes, PERC donated $5 to the GreenCare for Troops program.
 
“PERC is proud to support GreenCare for Troops, an organization that assists American service members and their families during deployment. Propane is an all-American fuel, and for many of the family-run, small businesses who make up much of the propane industry, supporting those who protect our nation is very important,” said Jeremy Wishart, PERC director of off-road business development. “We were excited to see how many lawn and landscape industry professionals participated in growing our donation to GreenCare for Troops. To reflect that spirit, we are rounding up PERC’s total donation to $5,000.”
 
GreenCare for Troops connects families of active-duty deployed service members with professional lawn, landscape, and snow removal volunteers in all 50 states. Volunteers provide free services to eligible families in their area for the length of their deployment, typically nine to 12 months.
 
PERC also presented Jim Langendorf, with Olympic Lawns from Springboro, Ohio, as the winner of its trailer giveaway sweepstakes. In addition to the trailer itself, a 16-foot Big Tex Trailer, Langendorf took home an Exmark Lazer S-Series propane mower, a Spartan RTHD 61” propane mower, a Stihl cordless blower and cordless trimmer, a water cooler, and 25 safety vests and pairs of work gloves.
 
Additional donations to Project EverGreen can also be made online at ProjectEverGreen.org/Donate. For more information on using propane for landscaping, visit Propane.com/For-My-Business/Landscape-and-Turf-Management.

Photo caption: (Pictured Left to Right) Cindy Code, executive director of Project EverGreen; Jeremy Wishart, PERC director of offroad business development, Joe Shooner, president of the Project EverGreen Board of Directors.
 
About PERC: The Propane Education & Research Council is a nonprofit that provides leading propane safety and training programs and invests in research and development of new propane-powered technologies. PERC is operated and funded by the propane industry. For more information, visit Propane.com.

PERC Restructures Safety, Education, and Compliance Team; Hires New Staff

(October 17, 2019) — The Propane Education & Research Council (PERC) recently added four new staff members to guide its restructured Safety, Education, and Compliance team. This team will develop and deploy educational and compliance materials to meet the challenges that employers face while addressing the educational needs of a changing workforce. The goal is for education, training, and compliance materials to be available in shorter programs, with a variety of easy-to-use delivery and documentation options. PERC will also have the capability to produce materials in-house, providing a faster turnaround time so that code and regulatory changes can be addressed, and customization of educational and training materials is available to states and companies.
Propane People in the news Propane Council restructures Safety, Education, & Compliance team welcomes 4 including Eric Kuster reports BPN oct 2019
“Safety and training are a key focus and top priority for PERC,” said PERC president and CEO Tucker Perkins. “This team of experts is going to build on that foundation and create new innovative training and safety materials and new innovative ways to deploy the material and access the training.”

To that end, Eric Kuster, a longtime propane industry veteran, has joined PERC as Vice President of Safety, Education, and Compliance, where he will head the team that advises senior management and the Council on all matters related to safety, education, and code compliance. Kuster has been a member of the PERC Advisory Committee since 2003 and is a former chairman of its Safety and Technical Training Working Group. In his new position, he will help guide the creation of innovative safety programs and direct the team’s ongoing work to transform workforce safety training materials to meet the evolving trends and demands of the industry.

Kuster most recently served as director of safety and certification for the National Propane Gas Association (NPGA), where he oversaw the CETP certification program. He was also a member of NPGA’s Education, Safety & Training Committee, where he received the NPGA chairman’s award, and is a past contributor to the NFPA 58 handbook. Prior to his work at NPGA, Kuster was assistant vice president of risk engineering at Crum & Forster; served 15 years at Fairmont Specialty Insurance as risk engineering manager; for nine years was a terminal manager and director of safety and training for Tri-Gas & Oil Co.; and for five years was a district manager at Ferrellgas.
Propane People in the news PERC welcomes 4 new staff to restructured Safety, Education, & Compliance team including Lyndon Ricard reports BPN propane industry's trusted news source since 1939. oct 2019
Lyndon Rickards, PERC’s new director of Safety and Compliance, will oversee PERC’s safety and compliance program offerings and will be responsible for incorporating industry regulations, codes, standards, and best practices into PERC education and safety resources. Rickards will also provide subject matter expertise in his engagement with companies, industry organizations, and committees related to safety compliance and training.

He was previously at Eastern Propane and Oil in Rochester, N.H., for 23 years. Rickards most recently served as assistant vice president of risk management, managing and developing safety; regulatory compliance; and technical training programs. He also developed training curriculum for 150 service technicians, drivers, and field service and sales personnel. He is a member of NPGA’s TS&S Committee and PERC’s Advisory Committee.
BPN's Propane People in the news PERC restructures Safety, Education, and Compliance team adds Emily Wood oct 2019
Emily Wood, PERC’s newly named Educational Content Development Coordinator, will be responsible for creating all course content for the council’s safety education, training, and compliance programs as well as overseeing the optimization of learner engagement, performance support, and measurement. Wood’s duties also include the creation of instructor and participant guides, and the design of various forms of learning used on PERC’s learning management system. She most recently worked as an e-learning developer for the Oregon Child Development Coalition, where she provided instructional design for classroom-based courses and created graphics, videos, and assessments for the courses.
BPN's Propane People In the news reports PERC has restructured its Safety, Education, and Compliance team adds 4 new staff including Chris Hanson Oct 2019
Chris Hanson has joined PERC as Learning Management System (LMS) Administrator. In this position, he will be responsible for the overall management, maintenance, and administration of PERC’s online LMS platform. His primary role is to optimize the user training experience with the online system. Previously, he worked for 10 years as training information manager for the Washington State Department of Corrections, where he was oversaw the development, implementation, and maintenance of its training programs. Hanson performed routine systems maintenance and administration, and assisted in the design, review, testing, and implementation of LMS updates and enhancements.

Economic Study Demonstrates Gas, Oil Benefits to California

(October 16, 2019) — A new economic impact study released by the Institute for Applied Economics for the Los Angeles County Economic Development Corp. (LAEDC) demonstrates the tremendous economic and fiscal impact California’s oil and gas industry has on the state’s economy.

2019 Economic Study Demonstrates Oil and Natural Gas industry provides huge economic and employment Benefits to California reports Weekly Propane Newsletter avail by subscription from BPN propane industry trusted source for news since 1939For the study, 2019 Report Oil and Gas in California: The Industry, Its Economic Contribution and User Industries at Risk, LAEDC analyzed extraction, production, refining, and petroleum products manufacturing, finding that industry activity generated $152.3 billion in total economic output, making up 2.1% of California’s overall gross state product in 2017.

The oil and gas industry also made significant fiscal contributions to California’s state and local governments, including $21.6 billion in state and local tax revenues and $11 billion in sales tax, $7 billion in property taxes, $1 billion in income taxes, and $96 million in Department of Conservation Division of Oil, Gas, and Geothermal Resources assessments.

“The oil and gas industry makes a significant contribution to the California economy in terms of jobs, labor income, economic output, and the industry’s contribution to California’s GDP,” said Shannon Sedgwick, senior economist at LAEDC and the Institute of Applied Economics. “Not only that, as a key input for products ranging from pharmaceuticals to flame-retardant clothing, many other California industries rely upon the state’s oil and gas industry and its production, downstream processing, and products as an input to their production and provision of services, such as California’s manufacturing industries, agriculture, transportation industries, and even establishments operating in our large leisure and hospitality industry.”

The report findings further illustrate the industry is a major employer, responsible for support- ing 365,970 total jobs in 2017, or 1.6% of California’s employment, of which 152,100 were direct jobs, representing a 6% increase since 2016 and a level fore- cast to rise an additional 1.6% over the next five years.

The research details industry segments that provide a career path for diverse individuals across the skills and education spectrum, all with relatively high wages that averaged more than $80,000 annually.

Findings include nearly 50% of the oil and gas industry workforce is ethnically diverse, 63% of industry workers do not have a bachelor’s degree, and one-third of all workers have a high school diploma or less.

“We’re extremely proud of the opportunities we are able to provide the Californians who work together to power this valuable industry,” said Catherine Reheis-Boyd, president of the Western States Petroleum Association. “While the economic impact numbers are compelling, the other side of the numbers tell the story of the state’s hard-working men and women who are deeply rooted in the industry, and in making their communities thrive. The labor income we generate highlights the industry’s commitment to the health, education, and living conditions of our industry employees. It is central to our economy and our way of life.”

(SOURCE: The Weekly Propane Newsletter, available exclusively by subscription)