Total US propane stocks concluded the annual summer build season well below the previous five-year average, fueling longstanding concerns among market participants of an inventory shortage coinciding with colder temperatures ushering in the annual increase in winter demand.
The combination of robust exports and static production levels suppressed propane stocks throughout the summer, a trend that continued unabated into September and undergirded speculation among market insiders that a winter inventory shortage was inevitable.
Some participants pushed back at even conservative mid-summer estimates that if propane stocks reached 80 million barrels by the conclusion of the build season, that total would suffice.
"I have them getting to 76 [million barrels] and that's not nearly enough," one US Gulf Coast market participant said in late July. "Nor is 80."
Propane sticks fell well short of that predicted threshold. Energy Information Administration data showed total US propane stocks reached a year-to-date high of 72.9 million barrels in the week ended Sept. 24. That total was just 71.5% of the highest level achieved the previous summer build, 101.9 million barrels in the week ended Sept. 25, 2020, and 75.5% of the total from the highest level reached during the pre-pandemic summer build of 2019, 96.5 million barrels in the week ended Sept. 13.
Even considering the relatively modest stocks total from the week ended Sept. 8, 2017, 78.8 million barrels, the 2021 high-water mark for propane stocks are only 79.4% of the five-year average from 2016-2020.
EIA data showed propane production as steady for most of the summer, between 2.26 million-2.39 million b/d, while exports averaged 1.19 million b/d over roughly the same period and dipped below 1 million b/d only twice during that 18-week span.
According to S&P Global Platts Analytics, global demand for propane is not expected to wane. European or Asian refiners with the ability to burn propane in place of natural gas have strong incentive to do so.
Propane is trading at a deep discount on heating content value, relative to natural gas and LNG prices internationally, which have been skyrocketing the past two months.
That dynamic holds true despite spot propane prices recently reaching seven-year highs, with Platts assessing non-LST October barrels as high as $1.5175/gal, more than threefold over year-ago levels.
Propane used for petrochemical feedstock is priced out of flexible feed ethylene crackers, and Asian propane dehydrogenation units are under pressure and could go negative if propane prices continue to rise.
However, propane demand for space heating during the winter is a dedicated service, with no substitute fuels available. Propane pricing linked to winter demand, and not natural gas, remain contingent upon the severity of the winter in the eastern US and Western Europe as well as China, Japan and South Korea. Early projections have forecast above-average snowfall and below-average temperatures in the eastern US as well as the Ohio Valley and the northern part of the Deep South.
If those projections come to fruition, there will be increased competition domestically for export propane barrels. EIA data showed propane product supplied, or implied demand, averaging 1.56 million b/d in December and January over the previous five years, about 435,000 b/d over demand totals from this August and September.
Given the limitation of current inventory levels, additional demand this winter must be satisfied by export barrels.
"I've been marketing propane for 10 years and every year the demand pie keeps shrinking and every marginal barrel gets exported," one market participant said. "Yeah, inventories are low, but honestly the domestic market doesn't need it. But, sentiment is otherwise, so it's going to be a very interesting winter."
The market appears to be moving in advance of that potential conflict manifesting.
Propane swaps in December and January were pricing at a modest premium over current spot levels, an unusual development considering the annual uptick in demand during the winter. The prevailing sentiment among market participants is to act in the near term to meet future propane needs, and that activity would support spot propane prices remaining strong.
"I expect propane prices to stay high but for volume to come back out of exports as needed to meet domestic demand," one market source said. "What price will it take to do that? I don't know. We will see!"