Inventoriesof propane and propylene have started to stabilize and increase as the winter heatingseason draws to a close; however, the outlook for the summer build season is notas bright as it was last year at this time, owing to the increased capacity to export.
Inventories will finish at recordhigh
Propaneinventories gained 599 Mbbl in the week ended March 25, according to the U.S. EnergyInformation Administration, and marked the second increase of the year after a smalladdition was reported in the week ended March 11.
If thereare no more net withdrawals from inventories in the weeks to come, it would leavethe week ended March 18 as the low point for the winter withdrawal season with 62.23MMbbl on hand.
Overthe last 14 years, the end of the withdrawal season has come between dates rangingfrom the week ended Feb. 27, 2004, to as late as April 19, 2013, so this year'send of the heating season is not special in that regard.
Whatmakes this year special is that the level of propane inventories, which is at 62.23MMbbl, would be the highest exit rate for the heating season on record and roughly8.46 MMbbl above the previous high exit rate of 53.77 MMbbl set in the week endedMarch 6, 2015.
Highlevels of inventories have weighed on propane prices for more than a year, and therelatively warm winter did not help to alleviate the surplus.
Aftera strong period of rebuilding in the summer of 2015, inventories reached a peakof 39.60 MMbbl above the five-year average in the week ended Nov. 20, 2015, andmarked the highest surplus to the five-year average on record.
Temperaturesfrom December 2015 to February 2016 were 4.6 degrees Fahrenheit above the 20th centuryaverage, according to the National Oceanic and Atmospheric Administration. Muchof the above-average winter temperatures were observed across the Great Plains,Midwest, Southeast, Northeast and parts of the West. Each of the six New Englandstates had a winter temperature that was record warm, according to the NOAA.
Inventoriesdrew down 43.98 MMbbl between a record high of 106.20 MMbbl in the week ended Nov.20, 2015, and the potential low point associated with the heating season in theweek ended March 18.
Muchof the decline was a result of increased export capacity, with startingup its expansion on the Houston Ship Channel, according to a company on Dec. 30, 2015. Capacityto export liquefied petroleum gas is now between 1.07 MMbbl/d and 1.11 MMbbl/d,based on calculationsmade by S&P Global Market Intelligence.
Inventory build may be shallowin summer of 2016
Whilethis year would be the highest exit rate on record, it may not indicate that a similarlyextensive build will take place during the upcoming summer as was the case lastyear, and could put a new record high in jeopardy.
"Idon't expect propane builds to come anywhere near what we experienced last year,on a weekly and monthly basis," Jon Miller, marketing representative for NGLSupply Wholesale and author of the Propanebuzz.com newsletter, said in a note March30. "By the time we reach the end of April, I expect this present year to beginlagging behind last year pursuant to national propane stockpiles."
Propanenet exports rose to 503 Mbbl/d in 2015 from 315 Mbbl/d in 2014, according to datafrom the EIA's "Supply and Disposition" report. In a recent to the agency's "Short-TermEnergy Outlook," the EIA projectednet exports to rise to 640 Mbbl/d in 2016 and to 740 Mbbl/d in 2017 as the GulfCoast terminal projects continue to ramp up.
Whileexports will continue to ramp up, production will only slowly increase from lastyear's record high.
Productionfrom gas plants may rise 20 Mbbl/d in 2016 from the prior year to reach 1.14 MMbbl/d.An increase of 60 Mbbl/d is anticipated in 2017, which would take production to1.20 Mbbl/d.
The latestinstallment of the "DrillingProductivity Report" published by the EIA on March 7 showed thattotal output of natural gas is likely to fall 451.07 MMcf/d in April from March,with the Marcellus losing 107.77 MMcf/d.
"It'snot going to come from the Marcellus-Utica area, as I have mentioned in the past,as gas production is slated to be down, which means propane production will be down,"Miller said. "I recently spoke with one propane industry supply logisticianwho confirms western production is also down."
Millersaid that most of the production increase for propane will come from the Gulf Coast,where production will be able to facilitate exports from the region to new destinationsin Asia.
"Theexpansion of the Panama Canal should be finished by mid-summer, which will onlyincrease the likelihood of additional propane exports leaving the United Statesand may possibly open up the market for spot cargoes to Asia, as cargoes will beable to load, leave and land within 30 days; this is a big deal," Miller said.
Transittimes for a Very Large Gas Carrier from the U.S. East Coast to markets in Asia-Pacifichad taken around 41 days, according to Miller, with a route through the Suez Canaltaking 43 days. The expansion of the Panama Canal could shorten that to 25 days.
"Thiscould be (and likely will be) a game changer," Miller said. "And whenyou considered the increasing export capacity for propane in the Gulf, I just havea hard time believing that this possible and modest increase in propane productionis going to move the needle much at all."
Withproduction of propane expected to gain 20 Mbbl/d in 2016 and that gain to be counteredby an increase in net exports of 137 Mbbl/d, it may take another warm winter in2016/17 to significantly lower demand, or for a boost in supply to prevent an overallincrease in prices next year.
Rightnow, that does not look like it will be the case. Miller suggested that if La Niñais in place next winter, temperatures could be significantly below normal.
"Ithink overall propane inventories will be between 70 MMbbl and 75 MMbbl come Oct 1, the normal peak of theseason build time frame," Miller said in an interview. "If we do experiencea La Niña to strong La Niña, that portends to colder-than-average winters for mostlocations other than the Southeast, and that region does not move the needle pursuantto propane consumption compared to the Midwest, Ohio Valley and Northeast."
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