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Concern over dropping inventories pushes propane prices higher

The propane market rallied between one cent and two cents per gallon in the holiday-shortened week ended Jan. 20, with concerns about rapidly falling inventories a key driver.

Lone Star pipeline grade propane at Mont Belvieu, Texas, rose 1.75 cents to trade at 74.90 cents per gallon in the week ended Jan. 20, while non-LST propane gained 1.70 cents to trade at 73.55 cents per gallon. Prices at the hub in Conway, Kan., advanced 1.50 cents at 71.50 cents per gallon.

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The fractionation spread, or frac spread, fell 1.08 cents in the week ended Jan. 19 to reach 27.81 cents per gallon. That compared to 28.89 cents per gallon on Jan. 12.

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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.

Inventories of propane and propylene fell 7.41 MMbbl in the week ended Jan. 13 to reach 72.25 MMbbl, according to the U.S. Energy Information Administration. The decline was the largest on record, according to data going back to late 2002, and put inventories at 17.70 MMbbl below the week ended Jan. 15, 2016.

Inventories were pressured by exports holding at a relatively high level of 998 Mbbl/d. That represented a decline of 45 Mbbl/d from the previous week, but exports remained only slightly below the record 1.31 MMbbl/d reached in the week ended Dec. 23, 2016.

Demand increased 324 Mbbl/d to reach 1.92 MMbbl/d and was 377 Mbbl/d above the five-year average compared to 65 Mbbl/d above it in the previous week.

"Overall U.S. domestic demand stood at 1.915 million bbls/day which came in a bit higher than our estimates," J.D. Buss, trading manager at Twin Feathers Consulting Inc., said. "But the other piece that played a part in such a strong draw was the almost 1 million bbls of lower production for all of last week."

Propane production dropped 139 Mbbl/d in the week ended Jan. 13 to reach 1.63 MMbbl/d, and compared to a record 1.80 MMbbl/d set in the week ended Dec. 2, 2016.

Despite the surge in demand and rise in prices, there do not appear to be any dislocations in the market yet.

"As we've noted in a few of our Daily Buzz reports, we aren't seeing or hearing of supply shortages on a regional basis," Buss said.

March crude oil futures advanced 7 cents during the trading week but gained $1.10 on Friday, Jan. 20, to settle at $53.22/bbl.

"Another bullish push for today is the anticipation of the weekend compliance meeting from the OPEC/NOPEC group that will meet in Vienna," Buss said. "With the rhetoric coming from Saudi Arabia and other Gulf nations, one finds it very difficult to see any bearish news coming out of the weekend meeting."

February natural gas futures dropped 21.5 cents during the trading week and settled at $3.204/MMBtu on Jan. 20.

Inventories of natural gas fell 243 Bcf in the week ended Jan. 13, according to the EIA, which was greater than the consensus expectation of a decline totaling 236 Bcf.

The latest six- to 10-day outlook from the National Oceanic and Atmospheric Administration showed above-normal temperatures expected across the northern Great Plains, the Great Lakes and the majority of the Northeast. Below-normal temperatures are expected in most of the country to the west of the Rocky Mountains, and the Gulf Coast.

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.