Midwest Propane Market Better Balanced Than Year-Ago Period
EIA outlines that the previous heating season saw a combination of depleted inventories and high winter demand pushing propane prices to record highs and prompting emergency measures to address supply shortages. This winter, Midwest propane markets are well supplied. However, EIA underscores that the changes prompted by events last winter continue to influence the market.
As of Jan. 30, PADD 2 propane inventories were 11.8 MMbbl above the same time last year and 6.3 MMbbl more than the five-year average. Stocks in the Midwest began building in the summer, and by Oct. 31 were 6.3 MMbbl higher than at the same time in 2013 and 0.7 MMbbl higher than the five-year average. Inventories have remained high since then because of lower demand during a less severe winter, with Midwest heating degree days so far this winter—October through January—8.5% below the comparable year-ago period.
EIA comments that inventory builds leading up to the heating season were supported by higher prices last summer at the Midwest propane storage hub in Conway, Kan. compared with prices at the Mont Belvieu storage hub. Higher Conway prices kept Midwest propane production in the region, rather than being sent to other regions, which resulted in volumes being boosted.
The higher inventories, less severe winter weather, and falling crude oil and natural gas prices have caused spot propane prices to fall. Spot prices reflect feedstock costs, processing costs, and overall market conditions, including demand and inventory levels. In 2013, 59.3% of propane produced in the U.S. came from natural gas processing, while 40.7% was from refinery crude oil processing. Because propane is produced from both natural gas and crude oil, the price of propane is related to the prices of both commodities. Since 2012, propane prices have tracked between crude oil and natural gas on an energy-equivalent basis. Recent falling crude prices have significantly narrowed the spread between oil and natural gas, and have pushed propane prices lower.
Conway spot propane prices averaged 97 cents/gal. and Mont Belvieu 94 cents/gal. in October 2014, 14 cents/gal. and 20 cents/gal., respectively, less than at the same time in 2013. As crude oil prices began to fall and propane inventories continued to build in both the Midwest and the Gulf Coast (PADD 3), spot propane prices at both hubs fell. By December, Conway spot prices averaged 53 cents/gal. and Mont Belvieu 56 cents/gal. For the week ended Jan. 30, prices at Conway averaged 45 cents/gal., 206 cents/gal. lower than the same week last year when supply shortages were most acute.
Although Midwest propane inventories are still quite high, last winter’s propane supply shortages, as well as changes in infrastructure and supply patterns, continue to affect wholesale and retail propane markets in the country’s breadbasket. Before January 2014, the spread between Midwest retail and wholesale prices averaged 65 cents/gal., reflecting traditional propane supply and distribution patterns from supply sources to the wholesaler and then to the propane retailer. However, as propane markets tightened last winter this spread rapidly increased as costs for moving volumes through the supply chain jumped. Although propane markets this winter are not experiencing problems, the retail/wholesale price spread has not returned to historical levels, EIA reports.
Changes in infrastructure, including the repurposing of the Cochin pipeline, have changed logistical networks for propane markets in the region. Propane supply networks now increasingly rely on relatively more expensive rail and long-range truck shipments. Propane wholesalers and retailers have also made changes to secure supplies well in advance of winter and have increased the amount of propane they hold in inventory. Wholesalers and retailers that chose to purchase propane well in advance of this winter likely did so when prices were about 50 cents/gal. higher than current prices. Retailers also encouraged customers to switch from will-call to firm contracts with automatic delivery, which provides greater security of supply but less flexibility on price. These changes in the supply chain have caused the retail/wholesale propane price spread in the Midwest to widen. The spread, which averaged 86 cents/gal. in October 2014, an increase of 22 cents/gal. from 2013, was 132 cents/gal. as of Feb. 2.
OUR DIGITAL PARTNERS