November 29, 2017 | By Robert Applegate
As the saying goes, “Those who fail to learn from history are doomed to repeat it” – Winston Churchill.
The current state of propane market in the U.S. bears a striking resemblance to this same time of year in in 2013, right before a Polar Vortex hit the Upper Midwest and Northeast, bringing cold temperatures and blowing out propane prices. In this issue of Get the Point, we will compare the propane market at the end of 2013 to the propane market now at the end of 2017 and try to deduce if another propane price blowout is on the horizon.
In some ways, it’s like Texas Hold ‘Em poker. There are a series of turning points at which market participants have to make decisions based on the current situation, their expectations about the future and their knowledge about how those future events could change the game. We’re early in the game, but the risks and opportunities that lie ahead are big.
Leading up to the winter 2013/14, propane production in the U.S. had spent the previous few years (and through the fall 2013) continually growing. In November 2013, propane production was roughly 18% higher than January of the same year.
Fast forward to Q4 2017, and propane production is once again moving steadily higher. Since a recent low point in January 2017, propane production in the U.S. has grown by 10% through November. This has helped keep propane prices at both Mont Belvieu and Conway relatively low and stable throughout most of the year, just as it did in 2013, especially during the summer. Figure 1 shows how similar 2013 and 2017 have been for the first eight months of the year on both price and production volatility, with the cost per gallon for the two years averaging about a $0.20/gallon differential between the comparable periods.
The price increase seen in the graph above in late summer and early fall is typical as consumers stock up on propane for the winter months. But both 2013 and 2017 found increases in propane demand moving well beyond the traditional levels. In 2013, a record bumper corn crop in the late summer caused propane demand to increase substantially for product drying. In 2017, it’s been large increases in propane exports, which has helped underwrite additional strong demand as arbitrage opportunities have remained available to U.S. shippers. This increased demand in both years resulted in a large draw on early-winter propane stock levels.
As propane demand surged in 2013 as well as the current year, stock levels fell below historical averages. Residential and commercial (res/com) propane demand, which includes crop drying and exports, averaged a total of 879,000 barrels per day (b/d) from January 2013 through August 2013. This accounted for 110% of propane supply from gas plants.
Similarly, in 2017 res/com demand for propane and exports for January 2017 through August 2017 (the most recent EIA reporting month) has averaged 1.195 million b/d, or as much as 111% of supply from gas plants. This can be seen in the table below, combining PointLogic Energy supply data with IHS Markit petrochemical data and EIA data.
The propane stock level changes (and ranges) and can be seen in Figure 2, where for the years previous to those of interest (2012 and 2016), the U.S. was at record stock levels right before the new, large demand sources in 2013 and 2017 took hold. These graphs are using three-year averages, since EIA recently moved to reporting propane separate from propylene and only shows history back to 2010, three years before 2013, to which we are comparing.
Each of the graphs for 2013 and 2017 follow very similar trends: record stock levels from the year before, followed by a large increase in demand that draws down stocks. In 2013, that demand pulled the stock levels close to the previous three-year average, whereas for 2017 stock levels have dropped to nearly the bottom of the previous three-year range. This is indicative of not only of the strength of current export demand, but also the volitility of the current propane market.
Using more granular data, we can look specifically at PADD 2, which includes the Upper Midwest. During the 2013 case year, the Polar Vortex had a huge impact on PADD 2 propane prices. Figure 3 shows that in both years, August propane stock levels were below the previous three-year range but not substantially different from each another in absolute numbers. The 2013 August propane inventory was 21.9 MMb, and the 2017 August propane inventory was at 23.4 MMb.
With propane inventories low and prices relatively flat, in November of 2013 the National Oceanographic and Atmospheric Administration (NOAA) released its U.S. Winter Outlook, which can be seen in Figure 4. At this time four years ago, the winter was expected to be cooler than normal in the Upper Midwest, and warmer in the South and New England.
Fast forward to current day, and the current NOAA U.S. Winter Outlook is showing something similar to four years ago: a cold air pocket in the Upper Midwest and a warmer southern U.S. and New England. This can be seen in Figure 5.
A cooler-than-average Upper Midwest is not always cause for alarm in the propane market, but what happened in winter 2013/2014 was not just cold weather, but unusually cold weather. This dropped temperatures in the region where propane held (and still holds) a large share of rural heating demand. What resulted were prices at Mont Belvieu surging by 40 cents per gallon. At the Conway delivery hub (the closest primary price hub to the region), prices jumped by more than $2.50/gal to over $4.30/gal. This price spike is evident in Figure 6.
While PointLogic does not have official price hub propane prices in rural areas, in 2013 there were anecdotal reports about people filling tanker trucks with propane in the Gulf Coast area and driving to the supply-strapped areas in the Upper Midwest for large profits. At that time, IHS Markit waterborne data reported that there was even at least one case of an LPG cargo ship leaving the U.S., only to turn around in the Atlantic Ocean, breaking its contract (price majeure) and selling the propane back to the U.S. market.
For suppliers and consumers in the Upper Midwest, the 2013/2014 winter was the perfect storm of increased demand that pulled down stock levels right before a larger-than-expected cold snap. Events in the current propane market are closely mirroring that recent history. If (always the big “if”) there is a larger-than-expected cold snap that hits the Upper Midwest this winter, propane prices could rise dramatically in those areas again, as inventories remain relatively low. With longer-term weather forecasts becoming harder and harder to predict, one can’t say with great certainty whether a polar vortex will eventually reveal itself or, for that matter, even where it might hit. But ‘if’ it does, hopefully, providers and consumers in the area will have their tanks full. This could help mitigate their pain if a price blowout does occur.
Stay tuned to PointLogic’s coverage of propane markets and NGLs as the winter heating season ramps up.