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Propane market drops on strong inventory build, weak demand

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Propane market drops on strong inventory build, weak demand

Strongproduction of propane along with another pullback in demand for the fuel helpedcreate a stronger-than-normal build in propane inventories, causing prices to fallnearly a penny per gallon in the week ended April 8.

Tradingwas reported to be light on Friday as many dealers and trading companies attendedthe National Propane Gas Association's Southeastern Convention and Expo in Nashville,Tenn., running through April 10.

LoneStar pipeline grade propane at Mont Belvieu fell 0.90 cent to trade at 43.25 centsper gallon in the week ended April 8, while non-LST propane dropped 0.95 cent totrade at 43.15 cents per gallon. Prices at the hub in Conway, Kan., declined 0.20cent and traded at 39.30 cents per gallon. It marked the fourth consecutive weekof declines across all three hubs.

The fracspread fell 1.46 cents to 19.27 cents per gallon on April 7 and compared to 20.73cents per gallon on March 31, according to data from SNL Energy. Prices of naturalgas rose 3.0% between the two dates while the price of the average NGL barrel lost2.5%.

The SNL-calculatedfractionation spread, or frac spread, is the difference between the weighted averageprice of natural gas liquids and the price of natural gas on a Btu basis. It isa general indication of the profit margin that a natural gas processor would expectto receive when the liquids are fractionated.

One ofthe largest bearish influences on prices during the week was the weekly inventoryfigure, in which propane and propylene stocks increased 2.03 MMbbl to 64.86 MMbblin the week ended April 1, according to data from the U.S. Energy Information Administration.The build makes it more likely that the 62.23 MMbbl reading two weeks earlier willmark the low point for the 2015/16 winter heating season.

Inventoriesare expected to rebuild at a shallower pace this summer compared to 2015, and potentially reach the 70 MMbblto 90 MMbbl range by the beginning of the heating season.

"Aswe enter warmer weather in the Northern Hemisphere, we expect exports to come offa little bit, propane production to remain strong, and therefore can reasonablypredict propane inventories to eclipse 85 MMbbl, perhaps 90 MMbbl by the end ofSeptember," J.D. Buss, trading manager at Twin Feathers Consulting Inc., said."But do not be fooled, as much quicker drawdowns will happen next winter."

The latestincrease pushed propane inventories to 25.64 MMbbl above the five-year average comparedto 23.97 MMbbl above the average in the previous week. The rebound is still significantlybelow the record surplus of 39.60 MMbbl set in the week ended Nov. 20, 2015.

The inventorybuild was helped by a decline in demand of 231 Mbbl/d to 838 Mbbl/d, and was thelowest level of demand since the week ended Oct. 30, 2015.

Propaneproduction remained near record highs, with 1.691 MMbbl/d produced in the week endedApril 1. The record of 1.701 MMbbl/d was set in the week ended Dec. 11, 2015.

"Welike seeing propane production at 1.691 MMBbbl/d," Buss said. "That tellsus production is not going away anytime soon."

The EIAalso updated the export figure, with 643 Mbbl/d exported in the week ended April1, compared to 632 Mbbl/d reported in the preceding five weeks. In its "Supplyand Disposition" datapublished May 4, the agency reported that exports of propane increased 115 Mbbl/din January from the previous month to reach 866 Mbbl/d.

Externalmarkets offered a slightly positive influence on propane prices, as crude oil finishedthe week with a gain of $2.93 and settled at $39.72 on April 8.

Crudeoil inventories were down 4.94 MMbbl in the week ended April 1, leaving the previousweek at a record 534.83 MMbbl. The drop in oil inventories was countered by an increaseof 1.44 MMbbl in gasoline and a gain of 1.80 MMbbl in distillates.

The declinein crude oil stocks was prompted by a drop in oil imports of 494 Mbbl/d and by anincrease in refinery utilization to 91.4% from 90.4% in the previous week.

Naturalgas prices finished the week with a gain of 3.4 cents to settle on April 8 at $1.990/MMBtu.

added 12 Bcf in the weekended April 1 and surpassed expectations from analysts that averaged an injectionof 8 Bcf.

Temperaturesin the latest six- to 10-day forecast from the National Oceanic and AtmosphericAdministration are expected to be below normal in most of the country to the eastof the Mississippi River except for parts of Florida and the Gulf Coast. Temperaturesthroughout most of the Southwest will also be below normal, while readings in theNorthwest and Great Plains states will be above normal.

SNL Energy is an offering of S&PGlobal Market Intelligence. Market prices and included industry data are currentas of the time of publication and are subject to change. For more detailed marketdata, including powerand naturalgas index prices, as well as forwardsand futures,visit our Commodities Pages.