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Propane falls on deteriorating fundamentals but oil keeps market buoyant

Thepropane market fell more than 2 cents per gallon in the week ended April 29 asproduction of the commodity rose to a new record, but stronger action in crudeoil was able keep prices from falling further.

LoneStar pipeline grade propane at Mont Belvieu declined 2.35 cents to trade at45.60 cents per gallon in the week ended April 29, while non-LST propane lost2.30 cents to trade at 45.55 cents per gallon. Prices at the hub in Conway,Kan., fell 2.20 cents, and traded at 42.50 cents per gallon.

Thefrac spread increased 0.23 cent to 21.23 cents per gallon on April 28 andcompared to 21.00 cents per gallon on April 21, according to data from S&PGlobal Market Intelligence. Prices of natural gas rose 0.5% between the twodates while the price of the average NGL barrel gained 0.9%.

TheS&P Global calculated fractionation spread, or frac spread, is thedifference between the weighted average price of natural gas liquids and theprice of natural gas on a Btu basis. It is a general indication of the profitmargin that a natural gas processor would expect to receive when the liquidsare fractionated.

Pressurewas added to the propane market from a strong gain in inventories of propaneand propylene. Inventories gained 2.26 MMbbl in the week ended April 22 toreach 71.20 MMbbl, according to data from the U.S. Energy InformationAdministration.

Thesurplus to the five-year average expanded to 29.08 MMbbl from 28.29 MMbblpreviously.

Thegain in propane stocks was partially the result of a sharp increase inproduction, which gained 97 Mbbl/d and reached a record of 1.783 MMbbl/d. Theprevious record was 1.701 MMbbl/d set in the week ended Dec. 11, 2015.

"We'veseen a jump like this before — in the first reporting week of November 2015when production saw a jump of almost 100 Mbbl/d," J.D. Buss, tradingmanager at Twin Feathers Consulting Inc., said after the inventory report. "Onecould say that the EIA has issues with the reporting but one could also saythat since this has happened before, there is precedence and the values may beaccurate."

Anotherfactor behind the jump in inventories was a decline in demand of 92 Mbbl/d,which pushed it down to 850 Mbbl/d. The lowest so far in 2016 was 700 Mbbl/dset in the week ended April 8 and was near a two-year low.

Thegains in inventories and production may have offered more pressure to propanewere it not for continued strength in crude oil prices. June crude oil futuressettled at $45.92/bbl on April 29, and gained $2.19 over the course of the week.

Oilstocks gained 2.00 MMbbl in the week ended April 22, according to the EIA, andreached another new record of 540.61 MMbbl. Gasoline stocks were up 1.61 MMbblwhile distillates fell 1.70 MMbbl.

Weaknessin the dollar played a role in the oil market's strength, but there is somebelief that the market is becoming overbought.

"Thesubstantial rise in prices from the mid-February low indicates that the marketis embracing a longer-term view that we have reached the bottom of the cycleand are starting to build towards a healthier supply and demand balance,"analysts at CreditSights, said in a note on April 29. "At current pricelevels, the market is a few bucks ahead of itself, taking into account theSaudi-Iran market share battle and other supply wildcards as well as globaleconomic growth concerns, but not hugely overbought."

CreditSightsanticipates an average price of WTI crude oil in 2016 of $40/bbl, which theysaid suggests that the market may end the year in the mid-$40s.

"Wearen't going to say this is the turning point for propane's current uptrendbecause it relies heavily on crude," Buss said.

Naturalgas prices lost 8.9 cents on the week and settled at $2.178/MMBtu on April 29.

Somesupport came on April29 with news that a Texas EasternTransmission LP natural gas pipeline had about 30 miles from Pittsburgh.The rupture caused parent company SpectraEnergy Corp to declare a force majeure on gas deliveries.

Priorto Friday's rally, pressure came from inventoriesof natural gas, which increased 73 Bcf in the week ended April 22, according tothe EIA. The addition was slightly higher than consensus expectations formednear 70 Bcf.

Thelatest six- to 10-day forecast from the National Oceanic and AtmosphericAdministration projects temperatures to be below normal in most of the countryto the east of the Mississippi River and across most of the Southwest. Most ofthe northern Mountain and West North Central regions are projected to seeabove-normal temperatures during the forecast period.

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