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Potential record January drawdown in propane stocks pushes prices higher again

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Potential record January drawdown in propane stocks pushes prices higher again

Data showing another sharp decline in propane inventories helped propel prices of the commodity through the week ended Jan. 27 to the highest levels since November 2014.

Lone Star pipeline grade propane at Mont Belvieu, Texas, rose 4.80 cents to trade at 79.70 cents per gallon in the week ended Jan. 27, while non-LST propane gained 4.15 cents to trade at 77.70 cents per gallon. Prices at the hub in Conway, Kan., advanced 5.00 cents and traded at 76.50 cents per gallon.

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The frac spread increased 0.09 cent in the five days ended Jan. 26 to reach 27.90 cents per gallon and compared to 27.81 cents per gallon on Jan. 19.

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The S&P Global calculated fractionation spread, or frac spread, is the difference between the weighted average price of natural gas liquids and the price of natural gas on a Btu basis. It is a general indication of the profit margin that a natural gas processor would expect to receive when the liquids are fractionated.

Inventories of propane and propylene fell sharply once again, according to fresh data from the U.S. Energy Information Administration. A decline of 4.03 MMbbl was reported in the week ended Jan. 20 which pushed the total inventory level down to 68.21 MMbbl. The surplus to the five-year average fell to 8.23 MMbbl from 8.84 MMbbl previously.

"This brings the total January drawdown to 15.8 MMbbl and on a pace to top the all-time January inventory drawdown from 2003, when propane stocks drew 19.9 MMbbl," Jon Miller, marketing representative for NGL Supply Wholesale and author of the Propanebuzz.com newsletter, said in a note on Jan. 25. "The second largest January drawdown occurred last January at 19.6 MMbbl and was mainly powered by exports."

The lowest inventory level reached near the end of the heating season in 2016 was 62.23 MMbbl in the week ended March 18, 2016, and recent drawdowns are putting that figure in sight to be broken.

Exports played a role in the inventory drop, with a gain of 80 Mbbl/d reported in the week ended Jan. 20. That brought exports up to 1.08 MMbbl/d from 998 Mbbl/d in the prior week. The record of 1.31 MMbbl/d was set in the week ended Dec. 23, 2016.

Some pressure on the propane market came from a drop in demand for the fuel of 531 Mbbl/d. The decline pushed demand down to 1.38 MMbbl/d which was 317 Mbbl/d below the five-year average and compared to 377 Mbbl/d above the average in the previous week.

The degree of pressure on propane from the latest fall in demand can be debated, as the relatively high level of exports and recently high demand figures are continuing to boost prices.

"In some respects, the current market has some similarities to the polar vortex of 2013/14," J.D. Buss, trading manager at Twin Feathers Consulting Inc. said. "No, we aren't having a cold winter and there is no domestic supply crunch, but overall demand, as registered by both exports and domestic consumption, is at record levels. Prices have been on a straight move higher."

March crude oil futures fell 5 cents during the trading week and settled at $53.17/bbl on Jan. 27.

The oil market has battled between pressure from rising rig counts and support from decreasing OPEC production.

"[T]he current apparent risk-off trade flow suggests a bit of anxiety that either compliance may prove weak or that the cuts may not go far enough to rebalance the market," Tim Evans, analyst at Citi Futures, said in a note. "Reports that Iranian exports may increase in February play to that doubt, but we also note that rising U.S. crude oil production and the current cycle of U.S. refining maintenance also limit the extent to which the market will tighten over the next few months."

March natural gas futures gained 14.7 cents during the trading week and settled at $3.358/MMBtu on Jan. 27.

Natural gas inventories fell 119 Bcf in the week ended Jan. 20 and fell slightly short of the market consensus calling for a drop of 121 Bcf.

The latest six- to 10-day outlook from the National Oceanic and Atmospheric Administration was somewhat positive for heating fuel markets, with below-normal temperatures expected throughout much of the northern third of the country except for the Great Lakes states which may see normal conditions. The southern half of the country is generally expected to experience above-normal temperatures.

Market prices and included industry data are current as of the time of publication and are subject to change. For more detailed market data, including SNL power and natural gas index prices, as well as forwards and futures, visit SNL Energy's Commodities Pages.