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Propane prices weaken with crude oil despite small inventory build

Thepropane market fell close to a penny per gallon in the week ended July 22, astraders balanced pressure from lower crude oil prices against support from asmaller-than-expected build in propane inventories.

LoneStar pipeline grade propane at Mont Belvieu fell 0.95 cent to trade at 48.55cents per gallon in the week ended July 22, while non-LST propane lost 1.05cents to trade at 48.05 cents per gallon. Prices at the hub in Conway, Kan.,dropped 1.20 cents, and traded at 43.40 cents per gallon.

Thefrac spread declined 0.51 cent to trade at 18.12 cents per gallon on July 21and compared to 18.63 cents per gallon on July 14, according to data fromS&P Global Market Intelligence. The average NGL barrel fell 1.7% betweenthe two dates while natural gas prices declined 1.3%.

Thefractionation spread, or frac spread, is the difference between the weightedaverage price of natural gas liquids and the price of natural gas on a Btubasis. It is a general indication of the profit margin that a natural gasprocessor would expect to receive when the liquids are fractionated.

Propaneprices fell as crude oil lost $2.46/bbl during the trading week and settled at $44.19/bblon July 22.

Crudeoil inventories fell 2.34 MMbbl in the week ended July 15, according to theU.S. Energy Information Administration. Inventories of gasoline were up 911Mbbl while distillates fell 214 Mbbl.

Inspite of the overall drop in combined inventory levels, the oil market weakenedon signals fromdrillers that the drop in production may be nearing an end.

Mostother data were positive for propane prices, including an inventory build thatwas sharply below normal levels. Inventories of propane and propylene gained 78Mbbl in the week ended July 15 to reach 87.44 MMbbl. The surplus to thefive-year average fell to 22.66 MMbbl from 24.08 MMbbl previously.

"Afterseven solid weeks of inventory builds of 1 million or more (average weeklybuild of 1.9 million), the weekly EIA report kicked out a 78 Mbbl build for theprior week," J.D. Buss, trading manager at Twin Feathers Consulting Inc.,said in a note. "Very strange and also very centered on a strong increasein the EIA product supplied, or their weekly demand figure."

TheGulf Coast PADD 3 saw a drop of 589 Mbbl, which is indicative of increasingexports. Maintenance had been conducted on the export dock owned by in late June and early July, which allowed propane inventories to grow at amore normal pace, but inventories in the Gulf Coast region have fallen onseveral occasions recently.

Exportsmay be somewhat high at the moment, as the startup of the Panama Canal on June 26 hasgiven hope to transporters that demand for propane would increase as shippingcosts and travel times to Asian consumers declined.

Demandfor propane increased 410 Mbbl/d to 1.15 MMbbl/d, according to the EIA, and wasthe first reading over 1.0 MMbbl/d in four weeks.

Thegain in propane demand has caused some to focus on the prospects that grainelevators may be rebuilding supplies for the upcoming season, although it is stillsomewhat early to get a good gauge of potential demand.

"Aswe move through the third quarter, crop drying in the Midwest will become amuch greater focus, while the Southeast has already seen drying start for sometobacco fields," Buss said. "Lower [corn] prices imply a higher focuson cost levels and even the potential to let crops 'stay in field' longer inhopes of not spending money to dry them."

Augustnatural gas futures gained 2.1 cents during the trading week and settled onJuly 22 at $2.777/MMBtu.

Priceswere helped by inventories,which gained 34 Bcf in the week ended July 15. The build fell short ofexpectations, which called for an injection of 37 Bcf.

"NatGas prices firmed on Thursday after a bullish weekly inventory snapshot,"Dominick Chirichella, Energy Management Institute principal, said. "Thisweek's report was bullish on all counts."

"Ithought we would get a bullishinventory number and that a rebound could carry prices toward $3.10/MMBtu,"John Turner, senior trader at Heritage West Financial, told S&P GlobalMarket Intelligence.

Market prices and includedindustry data are current as of the time of publication and are subject tochange. For more detailed market data, including powerand naturalgas index prices, as well as forwardsand futures,visit our Commodities Pages.