It has been observed by many that retail propane marketers often approach the coming winter by employing the supply plan that would have worked perfectly during the previous winter. The big problem with that, of course, is that every winter is different and what works well one year will not necessarily work as well again the next.
There were many concerns, ranging from the war in Ukraine to strong exports and potentially cold temperatures in the United States and around the world at this time last year; but a milder winter in the U.S and Europe helped slow demand, keeping U.S. inventory higher than expected and prices lower throughout the season. U.S. propane inventory for the week of March 3, 2023, stood at 60 MMbbl (million barrels) after having been at 35.5 MMbbl the prior year and 41.2 MMbbl the year before that.
It is notable that exports hit a record 1.845 MMbpd (million barrels per day) for the week of Feb. 10. Exports did decline to 1.675 MMbpd, 1.571 MMbpd and 1.377 MMbpd respectively in reporting the next three weeks.
BPN asked several supply experts about the likelihood that we will enter the 2023-2024 winter season in a much stronger position.
Exports Will Be a Key Factor to Watch
John Powell, senior vice president and head of Crestwood’s team of propane industry professionals, believes exports will play a strong role in determining supply.
“Given we are starting the build season with 60 MMbbl and increased production for 2023 coming mostly from the Permian [Basin], we should end the build season with plenty of inventory going into the 2023-2024 winter season,” said Powell. “The one item to watch is increased exports, particularly to Asia, as demand for chemical feedstocks increases as the Chinese economy rebounds in the second half of this year.”
Powell noted two main factors to watch for on exports: additional chemical demand in Asia, which is anticipated to pick up particularly in the second half of 2023, and approximately 45 new liquefied petroleum gas (LPG) shipping vessels, which will be added to the global fleet in 2023.
“The U.S. still has some incremental export capacity, so we could very well see increased exports year over year, which would affect the overall starting U.S. inventory position going into the winter,” Powell observed.
D.D. Alexander, president of Global Gas Inc. and chairman of the National Propane Gas Association (NPGA) Propane Supply & Logistics Committee, concurs with Powell that it all comes down to exports.
“True, we are coming out of winter with much higher inventories than we had the past two winters,” said Alexander. “However, I will remind you that we went from the lower range of the five-year average very fast last year. It is important to remember we can go back to low inventories as fast as we came out of the low inventories. Exports are the only thing that will move the needle regarding inventories. If our exports are high this spring and summer, our inventories will decrease accordingly. If our exports decrease, our inventories will build accordingly.”
Alexander noted domestic supply requirements don’t move the needle like exports do. “We can see domestic demand has a significant effect on regional supply issues but not so on total U.S. inventories. For example, this year we had high inventories nationally but saw supply constraints in the western region of the U.S.”
She noted that while the nationwide inventories are important to the price of propane — especially the relative percentage to crude oil — the local markets dictate physical supply constraints and logistics issues.
“At least some of the inventory we’re seeing is still in Y-Grade form in Mont Belvieu,” observed Anne Keller, managing director at Midstream Energy Group. “As the fractionators start up, we may see some spikes in pricing as export markets come in to increase liftings in Q3 to take advantage of what they think are seasonal lows. I don’t think this winter will see a mild January, so I wouldn’t count on high balances.”
“I think we end up closer to 50 MMbbl before any real builds start this spring,” said Phil Farris, director of wholesale marketing at 3Eight Energy. “The tug of war between production and exports will be the game to watch. I would guess inventory levels as comfortable by next fall, but nothing more than that … and the price will have some influence. No surprise. I would guess we start winter at the lower end of the five-year range, and it does in fact become an issue by this time next year.”
Jeff Thompson, supply consultant at Propane Resources, foresees a brighter future for propane exports due to current global events. “Europe will likely continue on its path to divest from Putin energy,” said Thompson.
“Europe will continue to look for efficiencies and savings anywhere on the energy spectrum. This will include propane. Last year was panic in Europe; this year is about planning in Europe. I look for Europe to continue to grow as an export market for the U.S.”
Thompson also believes there is an important market in Asia. “China will be critical to exports to Asia. If China can’t get traction and create economic growth this summer, which will be for our winter/Christmas demand, we could see a bit of a slowdown into Asia in 2023. If China does take off, watch out, as we could see propane make a strong run through build season.”
Alexander agrees with Thompson. “If Asia continues to ramp up and keep their economy open, they have the potential to ramp up exports from the U.S. We have additional ships available that will keep freight competitive and a market that can soak up a lot of exports from the U.S.”
For Alexander, a significant number of projects have come online in Asia that can keep propane flowing: “However, what can ramp up exports can also slow down exports. If China goes on another extended lockdown or has a recession, the U.S. exports will be the first to stop. Again, it all comes down to exports — either increasing or decreasing — with an adverse relationship to inventories.”
Production Levels & Other Regional Factors to Watch
“We could see strong inventory numbers in the Gulf Coast,” Thompson said. “The Midwest could be a different story, and we could possibly see weaker inventory numbers with production finding its way south. With Medford offline, the Midwest will have a harder time showing strong build numbers going forward. With some natural gas production in the U.S. below cost, we could also see less propane production this season versus last year.”
“The Midwest is always the challenge,” Thompson said. “The infrastructure operates hoping that no hiccups occur. One hiccup could throw the whole system into disarray. This past winter, MAPL terminals east of Kearney, Missouri, on the east leg went on allocation. The weather wasn’t even severe. I worry every winter what the industry will do when we finally get a ‘real’ winter.”
“This winter was essentially confined to the northern and western U.S.,” Farris said. “Supply, transportation and workforce issues were avoided in the South and East. We always see complacency in this industry after warm winters. Higher supply differentials and rail rates on top of that will likely slow down commitments and supply plans. Also, the projected change from La Niña to neutral will likely lead to a different weather pattern next winter.”
“Generally speaking, as a result of the warmer weather in 2022-2023, there were very few, if any, supply issues in the central and eastern U.S.,” Powell said. “The one area that experienced supply issues was primarily in the West. High natural gas prices discouraged NGL [natural gas liquid] production, and several production shut-ins and refinery issues required additional rail shipments from larger trading hubs like Edmonton, Belvieu and Conway to supply the West.”
Powell said that those shipments took multiple weeks to arrive, causing many users to simply run out of product for brief periods of time. “So, proper contingency planning should be considered in all areas of the country as consumers plan for the 2023-2024 season, just as they should do every year.”
“As we discussed, exports are the big needle mover,” Alexander stressed. “Any local supply issues can be caused by rail stoppages, truck driver shortages, the price of natural gas — just to name a few. It is important to know where your supply is coming from and that you have diversified supply of propane, rail cars and trucks.”
Lessons From the Russia-Ukraine War Over the Past Year
BPN also asked the experts about lessons and takeaways from the Russia-Ukraine war and its impact on U.S. propane.
“The good news is that Europe had a warmer than normal winter and is ending the season with tremendously high inventories of natural gas,” Powell said. “So, with Freeport coming back online for LNG [liquefied natural gas] exports, higher than normal NG [natural gas] inventories and additional LNG receipt points in Europe, this should greatly reduce the need for Europe propane demand, as many residential and commercial customers were using propane as a fuel instead of more expensive LNG. Currently, LNG pricing in Europe is at or lower than pre-war pricing, which will be good for everyone.”
“I think more U.S. propane will be finding its way to Europe, and it likely will be this way for the foreseeable future,” Thompson said. “Putin can’t quit the war. If he quits, he dies. This is not so much about the Russian way of life or cause. This is about Putin maintaining and holding on to everything that he has: power, wealth and control.”
Thompson believes this is now about a huge strategic blunder that Putin can’t back out of. “It is looking more like the war is going to be a long, bloody battle that solves no issues. The West will continue to supply Ukraine weapons, because in the big game of global geopolitical chess, a weakened Russia is a good Russia. With the West’s desire to see new leadership in Russia, continuing a fight that weakens Russia and forces regime change is seen as a good thing.”
According to Thompson, the unknown calculus is China. “How does China benefit and what impact does it have on U.S./China relations? An angry China may not be too excited about buying U.S. propane.”
“I’ll drift out of my lane with this one … but I’ll stay on the pavement and out of the weeds,” Farris said. “I don’t think this war will be going on a year from now. Russia can’t break the Ukraine resolve. If they [Ukraine] continue to turn the tide and gain momentum, backing from the West will increase. A lot of people want to see Russia concede, pull back and change leadership.”
“LPG can move on wheels or on the water,” Keller said. “Russia will have to pay more in freight versus selling to Poland et al., but they can move it to China and Southeast Asia.”
“The Russian invasion of Ukraine made Europe realize they should not have put all their eggs in one basket, especially Russia’s.” Alexander said. “I don’t think that lesson will be lost on anyone anytime soon.”
Is Now a Good Time to Position Propane for 2023-2024?
Noting that price levels allow marketers a decent margin while selling at a price consumers are accustomed to, BPN asked if now is a good time to lock in volumes for 2023-2024 and even 2024-2025.
“I’d start buying for winter when crude falls back, probably in the next couple months with the dollar and interest rates rising,” Keller said. “For 2024-2025, I’d definitely look to at least hedge pricing. I’m not in the camp that believes supply will grow like it did pre-COVID.”
“Yes, it is a good time to look and to begin layering,” Thompson said. “If crude [oil] moves back to $95-plus, and with lower propane production from the natural gas side this year, traders will be less likely to make a move down from current price levels for propane.”
Farris agreed. “The short answer is yes. You always cover your own commitments and eliminate any risk on those gallons. But even from a more speculative approach (the gambler), most retailers in the South have enjoyed great margins at the current cost/retail price level — maybe the best they have ever had. Do you assume retail prices stay where they are, lock in your cost and take that to the bank next year or the year after? Or are you an optimist … and think everything (costs) gets even better … but then risk that they get worse?”
“I always say buy what you sell and sell what you buy,” Alexander said. “If you are selling locked-in pricing to your customers, I would certainly cover it. If you are simply buying propane to cover some commercial accounts, I would start layering it in. It appears the upside is much greater than the downside this coming year. One thing is true in our industry: A lot of people remember last winter, but typically no two winters are the same. Come up with your supply plan and execute it. Just because you had high-priced pre-buy or extra physical contract gas doesn’t mean you should throw away your supply plan.”
Expect the Unexpected & Stick Together
Alexander shared one final thought:
“Every year is different; we never know what we may encounter,” she said. “However, the propane industry is incredibly resilient to the headwinds we face every winter. The NPGA has never been stronger. Please make sure you and your suppliers are members of NPGA. NPGA was very instrumental in getting the driver waivers as well as keeping the rail cars moving this past December. Please support the suppliers and NPGA; they are supporting you. We are much stronger together than we are as individuals.”