The propane market reacted to cold weather and signs of improving demand during the trading week, and moved to the highest levels in more than two years.
Lone Star pipeline grade propane at Mont Belvieu, Texas, rose 0.45 cent to trade at 63.00 cents per gallon in the week ended Dec. 16, while non-LST propane increased 0.65 cent to trade at 62.45 cents per gallon. Prices at the hub in Conway, Kan., gained 1.15 cents and traded at 61.40 cents per gallon.
The fractionation spread, or frac spread, increased 1.05 cents during the week ended Dec. 15 to trade at 24.80 cents per gallon, compared to 23.75 cents per gallon on Dec. 8. Natural gas prices fell 7.1% between the two dates, while the average NGL barrel lost 2.1%.
The 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.
Colder weather added a boost to propane prices on the prospect that demand would improve, but the relatively small weekly gain could indicate that a lot of the cold weather had already been priced.
"What's interesting from the natural gas side is the fact that prices have been on the slide from December 9th through today," J.D. Buss, trading manager at Twin Feathers Consulting Inc., said in a note on Dec. 16. "Due to the overall hub and regional liquidity in natural gas, that market can (and will) trade more on future perspective."
Temperatures fell below zero across much of the upper Midwest during the week and are expected to return to those levels early next week after another bout of snow.
Propane demand increased 25 Mbbl/d to 1.50 MMbbl/d in the week ended Dec. 9, according to the U.S. Energy Information Administration. Demand gained 317 Mbbl/d in the previous week.
"On a regional basis, we are looking for more propane deliveries next week in response to the bitter cold temps over the coming weekend," Buss said.
The surge in demand helped push inventories down 3.63 MMbbl in the week ended Dec. 9, causing them to fall to 95.62 MMbbl. The surplus to the five-year average dropped to 24.09 MMbbl from 26.33 MMbbl previously.
A jump in exports during the EIA's reporting week also helped to lower inventories, as exports gained 177 Mbbl/d to reach 902 Mbbl/d. The Gulf Coast was likely the largest source for exports during the week, as PADD 3 inventories accounted for 2.65 MMbbl of the overall decline in propane stocks.
On Friday, Phillips 66 Partners LP announced that its liquefied petroleum gas export terminal in Freeport, Texas, is operational and loaded its first cargo on a very large gas carrier that departed Dec. 16.
The crude oil market added slight support to propane, as January 2017 WTI futures finished the week with a gain of 40 cents and settled on Dec. 16 at $51.90/bbl.
Prices fell in the middle of the week after the U.S. Federal Reserve tightened monetary policy by raising the short-term Federal Funds rate, but were able to rebound by the end of the week on the prospect of oil production cuts.
"The petroleum markets are extending their recovery from Thursday's low as some confidence in planned production cuts returns to the market," Citi Futures analyst Tim Evans said. "While the market will eventually need to see some evidence of an actual reduction in output, the talk of production cuts and the notices of lower allocations sent to refiners are sufficient to support market sentiment for now."
January 2017 natural gas futures dropped 33.1 cents during the week and ended on Dec. 16 at $3.415/MMBtu.
Natural gas inventories fell 147 Bcf in the week ended Dec. 9 and surged past market expectations for a decline of 132 Bcf.
The withdrawal brought the total U.S. working gas supply to 3,806 Bcf, turning the year-on-year surplus to a deficit of 50 Bcf and shrinking the year-on-five-year average storage surplus to 186 Bcf.
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 power and natural gas index prices, as well as forwards and futures, visit our Commodities Pages.