As December 2022 began, propane inventories in the United States were in pretty good shape. With 90 MMbbl (million barrels), inventory levels were 18 MMbbl higher than a year ago. Should marketers feel comfortable at these levels? We have seen winters bring a depletion of 50 MMbbl during December and January. BPN asked several supply experts about the chances for a significant depletion this year and how various regions of the U.S. would be impacted if we saw a depletion of 50 MMbbl during the winter months.
Changes Can Happen as Exports, Colder Temps Ramp Up
“The majority of exports will go out of Belvieu, which is where we would see the biggest impact to inventories in the U.S.,” said John Powell, senior vice president and head of Crestwood’s team of propane industry professionals. “As the U.S. has experienced a mild winter thus far, we continue to see inventories build in PADDs 1-3. There should be limited impact of additional exports in PADDs 1 and 2 as pricing in those areas will keep the product local if the domestic demand requires additional inventories.”
“It looks like we’ll stay in good shape, but I think we’ll still have a winter,” said Jeff Thompson, supply consultant at Propane Resources. “Europe and Canada have been experiencing a cold winter, and it only takes a small shift in air flow to get to colder and colder-than-normal temperatures here. We can go through 26 million more barrels pretty fast. Once demand shows up, propane prices can quickly move up 23 cents per gallon.”
“You’re looking at a roughly 20-week time period (December through mid-April). A 2 MMbbl draw per week on average would get you down to 50 MMbbl by the end of winter,” said Phil Farris, director of wholesale marketing at 3Eight Energy. “Certainly possible. If that kind of consistent winter demand and export activity happens, it would surely affect price and logistics (transportation snags, Hours of Service restrictions, etc.). But the difficulties would likely be toward the end of winter — the last lap of the race. Propane retailers are tough. They power through the last lap.”
“Currently, U.S. exports are limited out of Marcus Hook and the Gulf Coast. Marcus Hook has limited export capacity due to facility and supply constraints, and the Gulf Coast is limited due to the 28-day backup at the Panama Canal for VLGs,” said D.D. Alexander, president of Global Gas Inc. and chairman of the National Propane Gas Association Propane Supply & Logistics Committee. “There may be additional Gulf Coast exports that choose to go the long route or traders can use smaller ships, but this takes more cargos and costs more freight.”
Alexander noted, though, that if supplies somehow get pulled down by 50 MMbbl, the Northeast and Gulf Coast would be the hardest hit directly, and then Conway and the Northwest indirectly.
“PADD 1 has no fast way to replace the inventory volume in the winter if it is drawn down suddenly due to increased exports (or weather). PADD 3 would be impacted due to the sheer volume of export capacity built over the last several years if exports pulled down supplies by 50 MMbbl. The U.S. is able to export large volumes due to the increased export facilities built in the Gulf. PADD 2 would be impacted if PADD 3 volumes were severely drawn down.”
Alexander believes this would leave less barrels to move north to Conway to feed the Midwest and upper Midwest. “This is extremely critical this year due to the Medford Fractionator being down because of the fire.”
Lastly, she mentioned the upper Northwest would be impacted if the exports increased out of the upper Northwest/Prince Rupert and the new propane dehydrogenation plant in Canada needed additional propane. “This would leave less propane available to move to PADDs 4 and 5.”
“Given current economic conditions and the loss of strong demand from China, it’s unlikely we’ll see this kind of draw again this season,” said Anne Keller, managing director at Midstream Energy Group. “European storage is either maxed out, U.S. wood pellets are being brought in to support heating demand and/or rail shipments from Russia are displacing some U.S. product there.”
Keller said the big inventory build in Canada despite the recent brutal cold spell in the western part of the country indicates slack demand from Asia.
“We’re all waiting for a big cold snap to deplete stocks in the market areas, and production continues to head to the hubs in the meantime as gas volumes increase,” Keller said. “If we see a sustained interval of cold weather in the U.S. this year, the impact would likely be due to constraints on last mile deliveries due to road conditions more so than limited product.”
Factors That Could Lead to U.S. Supply Challenges
BPN asked the experts what key factors could lead to supply challenges and what areas of the U.S. are already impacted.
“If the possibility of a rail strike has indeed gone away, then I would say weather disruptions would be the main concern … and the effect that has on transportation,” Farris said. He hopes a COVID-19 outbreak (or some type of viral, flu-like outbreak) doesn’t happen, but it’s always a possibility. “That takes employees, drivers, etc. out of commission.”
Powell agreed that if the railroad strike is behind us, the biggest challenge with an extended weather event will be truck transportation in the local markets.
“While this issue could affect all areas, the areas with the highest concentration of demand — PADDs 1 and 2 — would be affected the most," he said.
“If we have dramatically cold weather like a prolonged polar vortex, along with stronger exports, we could see our inventories deplete rapidly,” Alexander said. “Of course, it all depends on how long it lasts and how much the exports can be increased. Honestly, with the large inventories we have, this is hard to imagine, but it is definitely possible.”
Alexander does not rule out more challenges with a work slowdown with the railroads. “I can’t imagine the rail unions are too happy about Congress forcing the deal down their throats and making them go back to work,” she said. “I think we just may see the rail become even more unreliable than in the past for some time to come. I think we have begun to see this in the Northeast. Also, trucking is still a huge issue across the U.S. If we have to truck gas farther, there just isn’t any extra capacity to handle the increased miles — nor is there additional capacity if we have severely cold weather for any length of time.”
“So far, we’re not seeing much in terms of supply challenges related to product availability,” Keller said. “Refilling tanks at ski resorts in 8 feet of snow could be an issue. Although we’ve seen blizzard conditions in West Texas already this year, we’re currently in the middle of a December heat wave in Houston. And prices are much lower than this [past] summer when crude topped out at $60 over current levels.”
Is It Time to Buy More Gallons for This Winter & Beyond?
BPN asked if the pullback in the market presented a buying opportunity for the retail propane marketplace.
“I’m not sure we’ll get out of this winter unscathed,” Thompson said. “Too often in winter, we’re jerked one way and then the other. Too many are banking on this being over, but the squeeze usually comes in the first quarter. It just takes a few barrels in too few hands. Too many short positions can cause a January-February blowup. The Midwest is usually the tough spot. PADD 2 and Conway can often get nasty.”
“Market pricing has been extremely volatile and more headline-driven recently,” Powell said. “Predicting pricing is extremely difficult, so managing your exposure should be a high priority as purchases and sales are made in the spot and forward markets.”
“I think the consensus right now is that propane is oversold and under the radar, and everyone is ‘waiting’ for demand and exports to eat up the production increases,” Farris said. “If there are uncovered sales for Q1 2023, I would say yes … although a majority of retailers probably covered those sales through the summer and fall. Despite doing the ‘right thing’ and covering gallons at an acceptable margin, some will feel they guessed wrong or made a bad decision and ‘lost money.’ This sentiment will often take them out of the market for the next season (or longer) … for fear of making another ‘mistake,’ when in fact they haven’t made one … but may be getting ready to. I think historical price data would support buying for the next two to three years. Take the peaks and valleys out.”
“I believe the upside risk is much higher than the downside risk,” Alexander said. “Having said that, I always caution marketers to be very careful if they are speculating. If they have accounts they are trying to shield from price volatility or they have customers who want to prebuy, then yes. They need to remember, however, that the price will fluctuate based on where our inventories are when we come out of winter.”
“Wholesalers who weren’t able to take advantage of the so-called backwardated price curve this [past] summer to acquire winter barrels are now sitting on expensive inventory and are most likely not going to be buying again until they’ve run down their current stocks,” Keller said. “If there’s a year-end scramble for producers to clear the books, it might be a chance to top off supply for the 4-6 weeks of really cold weather we could still see this year. The truly bold and brave will add to that buy to start a lower cost layer of inventory for next year.”
Keller said that despite bullish projections from the Energy Information Administration (EIA), U.S. oil production did not grow at the level the government was looking for to offset the sales from the SPR. “It looks unlikely that it will ramp strongly next year, either, for a wide variety of reasons, putting OPEC+ back in the driver’s seat in the world markets. Regardless of whether the government tells us so, a significant part of the global economy is in recession, which is reflected in an overall price decline in both energy and ag commodities.”
Crude Oil a Wild Card
“I believe crude is the big wild card,” Alexander said. “Once oil stops being pulled from the strategic reserve, crude may very well be in short supply. Unless we can increase our crude production substantially, we may see crude really take off. There are many variables in trying to predict the price of crude, but it needs to be considered. Most of the time, when crude goes up, propane goes up. We have been somewhat disconnected to the price of crude recently due to our large inventories, but that can change very fast.”
The Pendulum Swings, but Customers Like Consistency
“The old pendulum swings,” Farris observed. “To simplify, let’s say 100 MMbbl of propane inventory and a 50 cent per gallon price is one extreme, and 50 MMbbl and $2 per gallon represents the other extreme. We’ve been at or close to both of these neighborhoods in the past 10 years. The pendulum never stops; it just changes direction, looking for equilibrium, which it never finds for long. And nobody can predict that day when data, news and momentum change direction.
“We have seen nearly a $1 per gallon (or 60%) decrease from March to early December. Time to buy? Maybe.”
Farris shared a quote from John Maynard Keynes: “‘The market can stay irrational longer than you can stay solvent.’
“A famous investment quote. Not that anyone is insolvent, but the point is things don’t happen when or just because they’re supposed to,” Farris said. “Successful propane retailers are not traders; they are service providers. And that shouldn’t change because of the price of propane. You buy to have control over your cost, and hopefully that means control over your selling price. Take the market peaks and valleys out of play — consistency in the customer’s eye is a big plus in the retail energy business.”
Structural Change Is the Best Way to Describe the Current Market
J.D. Buss, president of Twin Feathers Advisors, made some observations regarding the current market.
“While propane prices have dropped significantly in the past couple of months, the larger change has been in the structure of the forward price curve,” Buss said. “Instead of the propane curve resting in backwardation (current month prices higher than future months), prices are now in contango for the 2023-24 season.”
Buss noted that summer values for Belvieu have been trending anywhere from 3 to 6 cents per gallon below middle of winter 2023-24 values. “Go back nine months and this scenario would have seemed unfathomable,” he said. “Russia’s invasion of Ukraine, the EU calling for an oil embargo and natural gas prices skyrocketing all seemed to point to endless upside for energy commodities. That bullish situation drove many markets, including propane, into a very bullish, backwardated price curve.”
As the Beatles sang and the great biblical author stated, there’s a season for everything, Buss observed. “Inventory levels have escalated quickly over the last two months, but the more persistent theme has been growing production of natural gas liquids. These two facts have shifted the narrative from a bullish stance to a bearish and brought about a complete structural change in the propane price curve.
“Such a strong change has reduced the broader concerns of supply challenges for this winter and mainly left the focus to logistical challenges,” Buss said. “Will the railroad union resolution truly work and keep cars rolling properly over the coming two months? Will a large weather event hinder the movement of transports or push retailers to further terminals? These ‘tried and true’ items will likely be the main challenges of this winter.
“What about exports, though? Won’t they obliterate the healthy surplus of inventory sitting in the U.S. and force radical supply decisions?” he asked.
He noted that according to the EIA’s weekly data, exports are already at record highs. “More volume could be loaded and exported, but three major items are slowing (or controlling) that possibility. First, spot freight values for VLGCs are near record highs and eating up the majority of the international price difference. Second, continued delays at the Panama Canal have forced vessels into longer journeys and helped support higher freight costs. Third, and most volatile, what will weather be like in Europe and Far East Asia in first quarter 2023? Northern Europe during the first part of December is cold, but some forecasts show weather moderating in January.
“The final point to consider when looking at exports and the current inventory surplus: Both exports and domestic demand need to dramatically increase to pull down inventory levels,” Buss said. “An increase of 150,000 bbl/day in exports seems high but only accounts for an additional 9 MMbbl over two months. Both North American demand and exports need to ratchet higher to eat up the inventory surplus and cause additional shortage fears.”
All of this brings us back to the beginning point: structural change, according to Buss. “The structural change in the forward price curve to contango tells the market that the bullish vibe from early in 2022 has faded. If this structural change continues, then we could be in for a very different summer in 2023 versus what was experienced [in 2022].”
