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Propane prices could face upside risk on inventory normalization


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Propane prices could face upside risk on inventory normalization

Cold and wintry weather across the Midwest in December weighed on propane inventories as consumers filled tanks in anticipation. While prices have been bolstered by strength in crude oil recently, increased heating demand could also remain a factor.

Arctic chill boosts demand

Temperatures reached into the negative teens in the northern parts of the Mountain and North Central regions as well as most of New England in the week ended Dec. 17, and the Midwest experienced another bout of sub-zero temperatures early in the week ended Dec. 24, according to the National Oceanic and Atmospheric Administration.

Temperatures are expected to moderate over the next eight-to-14 days, but the December cold should continue to weigh on inventory levels as propane tanks are refilled.

In its fiscal first-quarter earnings release on Dec. 9, Ferrellgas Partners LP reported that it sold 111.19 million gallons of propane to retail customers in the three months ended Oct. 31. Sales were up 0.2% from the same quarter a year earlier when they were 110.97 million gallons.

The gain in sales occurred despite temperatures that were 35% warmer than normal and 6% warmer than the prior-year period, according to Ferrellgas. Part of the reason for the gain was growth in the customer base and retention of existing customers, according to the company.

Though not mentioned, some early-winter heating demand may also have been captured, as efforts by the industry to convince consumers to fill tanks earlier in the season in the wake of the regional shortages in early 2014 have been effective.

Propane inventories were last reported at 92.54 MMbbl in the week ended Dec. 16, according to the U.S. Energy Information Administration. That compares to 97.64 MMbbl reported a year ago in the week ended Dec. 18, 2015.

Lower inventories were reflected in residential propane prices, which were reported by the EIA at a preliminary $2.188/MMBtu in the week ended Dec. 19. That compares to $1.988/MMBtu in the week ended Dec. 21, 2015.

A second factor in boosting the market has been colder temperatures compared to last year.

The recent cold wave pushed the number of population-weighted heating degree days for propane up to 245 in the week ended Dec. 19 compared to 213 in the previous week and 167 in the comparable week ended Dec. 21, 2015, according to the National Oceanic and Atmospheric Administration.

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The rise in heating degree days follows a typical A-shaped pattern during the winter, indicating more heating demand for propane which then puts strains on the supply chain.

The spread between the residential prices for propane and the wholesale price expands as the distribution system is taxed. Overtime for drivers, the need for hours-of-service exemptions and increased breakdowns of equipment cause the spread to widen along with colder weather.

The spread between residential and wholesale prices also follows the same A-shaped pattern. It was fairly low at 141.8 cents in the week ended Dec. 19, which compares to last year's 156.6 cents in the week ended Dec. 21, 2015.

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Structural return normal

In addition to lower inventories and colder temperatures compared to a year ago, propane prices have been boosted by higher exports which may indicate that summer inventory builds in coming years could be smaller than in the last two years.

Analyst Kelly Van Hull at RBN Energy showed in a report on Dec. 18 that inventories grew 55 MMbbl during the restocking season in 2014 and by 53 MMbbl in 2015. Despite a small uptick in production in 2016 from the prior year, inventories built only 41 MMbbl during the restocking season.

"In 2014, product supplied averaged 1,051 Mbbl/d in the March-through-November period," Van Hull said. "Product supplied fell as low as 770 Mbbl/d in May 2014, as heating demand declined and steam crackers were only running 300 Mbbl/d of propane due to relatively unfavorable cracking economics."

Exports of propane and propylene averaged 422 Mbbl/d in 2014 and 616 Mbbl/d in 2015, according to the EIA. The figure rose to an average 754 Mbbl/d so far in 2016.

Van Hull said that a return to normal inventory builds is possible due to the rise in exports.

"Add to all this the fact that propane production growth slowed and then flattened in 2015 and 2016, and a scenario in which the annual build in propane stocks in the future slows to more 'typical' levels seems quite plausible."

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 SNL power and natural gas index prices, as well as forwards and futures, visit SNL Energy's Commodities Pages.