Midwest May Lose Canadian Backstop on Diverging Propane Fundamentals
January 14, 2019
Propane prices in eastern and western Canada greeted the new year with sharp declines. OPIS-assessed prices in Sarnia, Ontario, and Edmonton, Alberta, both lost some 20% over the first eight trading days of 2020.
In contrast, prices in the natural gas liquid (NGL) hubs named after Mont Belvieu, Texas, and Conway, Kan., trod water over the same time frame, and regained their premium over Edmonton in the bargain.
This is relevant to the Midwest market in particular. Though Canada is a small market in comparative terms, Canadian supplies have served as a reliable insurance policy for the American heartland whenever tightness threatened.
This comfort might be ebbing away, regardless of this month's Canadian price declines.
The shift in reality is driven by two factors. First, all of the propane surplus in what is commonly described as an "oversupplied" United States resides in PADD3 (Gulf Coast) caverns. PADD2 (Midwest) may, in fact, be somewhat under-supplied.
Second, Canada's own inventories are at multiyear lows heading into this year's peak winter demand, at a time when that nation has also started exporting propane over the Pacific Ocean in addition to the usual volumes railed to PADD1 (East Coast), PADD2 and PADD5 (West Coast).
Diverging dynamics have brought the North American neighbors to these respective situations.
On the American side, last week's Energy Information Administration (EIA) numbers showed nationwide propane-propylene stocks at 88.89 million bbl as of Jan. 3, more than 20 million bbl higher than where 2019 began at 68.74 million bbl.
PADD3 accounted for 59.38 million bbl of the total, also some 20 million bbl higher than the 39.48 million bbl at the start of 2019.
In contrast, PADD2 on Jan. 3 saw its first print below 20 million bbl since last June, at 19.48 million bbl. This was some 917,000 bbl lower than the 20.39 million bbl reported for the first week of 2019.
Surging domestic production of propane, borne on a slate of new fractionator startups, alongside flat domestic demand, has abetted the ballooning in PADD3.
The upshot is untypically low prices for Mont Belvieu propane -- a malaise that seems unlikely to go away soon.
Current Mont Belvieu propane prices in the low-to-mid 40cts/gal and 30%-32% of WTI are materially weaker on both fronts than levels in the mid-60cts/gal and 55%-57% of WTI seen in January 2019.
This weakness is welcome news for export buyers. However, despite waterfront expansions, PADD3 must still contend with a physical cap on how much propane can be exported at any given time. In addition, exports have an inherently stop-start nature because of intermittent fog and the "batched" nature of ship loading.
This means Mont Belvieu propane prices could remain volatile -- at historically low levels, to boot -- for the foreseeable future, crude oil prices and geopolitical realities remaining equal.
None of this is likely to benefit PADD2. This is because, in contrast with the rest of America, the Midwest is facing a more "normal" year.
A delayed and unusually wet harvest led to a run on crop-drying propane through the beginning of December, which left regional inventories comparatively depleted ahead of the traditional onset of winter.
Outlook maps from the National Oceanographic and Atmospheric Administration (NOAA) now hint of colder-than-normal weather blanketing the heartland in the coming weeks. Should this forecast come true, Canada's standing as the "supplier of last resort" may no longer be automatic.
This is a reversal in its own right. Not too long ago, Canada had more propane than it could get rid of.
The 2014 reversal of the Cochin pipeline, which carried Canadian propane exports into the United States, catalyzed a process that caused more product to remain north of the border, when U.S. shale production was coming into its own.
An immediate manifestation was Edmonton propane sinking to negative prices in the spring of 2015 (i.e., sellers paid buyers to take it away), as seen from OPIS Time Series data.
A 180-degree swing has since taken place, thanks to new demand pulls on Canadian propane. On the export front, the AltaGas-Vopak terminal in Ridley Island, B.C., began operations last May, and is sending an average of two very large gas carriers (VLGCs) or 1.1 million bbl to Asia each month.
AltaGas executives on an October conference call all but dismissed the U.S. as its target audience for any surplus propane out of Canada. This stems from the large premium Asian prices, via the Far East Index (FEI), have over Mont Belvieu.
"Our fundamental assumptions underlying our midstream strategy is that the marginal molecule of natural gas and natural gas liquids in Canada will need to be exported -- not to the U.S. but to Asia," said President and CEO Randy Crawford.
At the time of the call, Crawford expected to sell around 40,000 b/d of propane to Asia for the fourth quarter, with 85% of pricing already locked in via hedges. "For the remaining 15% of barrels, we pay Edmonton prices plus transportation fees, and in return, we have realized FEI premiums," Crawford said.
Notional netback calculations, including freight estimates, showed FEI prices running an average 15cts/gal over Mont Belvieu over the fourth quarter of 2019, with peak levels topping 40cts/gal by the end of December. January-to-date notional netbacks show the FEI at an average of 30cts/gal over Mont Belvieu.
Canada's proclivity for exporting propane into markets other than the U.S. is likely to gain further traction. AltaGas itself plans to increase the nameplate capacity at Ridley Island from the current 40,000 b/d to potentially double that number, according to executives on the same conference call.
Two additional export terminals are on the anvil: Pembina Pipeline Corp.'s 25,000-b/d Prince Rupert location on Watson Island, B.C., that is scheduled for a mid-2020 startup and would cater to Handysize ships; and a proposed 46,000-b/d project fronted by Pacific Travers Energy in Kitimat, B.C.
Higher regional demand is also expected to become a factor. Two propane dehydrogenation (PDH) plants in western Canada, fronted by Inter Pipeline and a Pembina-Kuwait joint venture, are scheduled for startups in 2021 and 2023, siphoning off more Canadian propane.
These emerging trends were the backdrop on which Edmonton propane surged to a premium over the Conway product last year. It is to be stressed that this price spike did not appear to slow Canadian exports to PADD2. In fact, posted wholesale prices at major Midwestern distribution terminals during the crop-drying rush in the fall of 2019 were comfortably above even the elevated Edmonton price to justify railing propane in from north of the border.
Nonetheless, a changed landscape characterized by lower Canadian inventories, higher exports and new PDH consumption would factor into any future shortage situation stateside.
This may bring the equation down to how much propane Canada really has to spare in the first place. Statistics from the National Energy Board (NEB) throw an enlightening spotlight on this critical element.
At the beginning of December 2019, propane stocks in Western Canada stood at 4.18 million bbl, 38% lower than the 6.75 million bbl reported for December 2018. Eastern Canada had stocks of 2.44 million bbl compared with 2.73 million bbl.
Propane supplies in Canada as a whole stood at 6.62 million bbl at the start of December 2019, 30% lower than the 9.49 million bbl reported a year ago.
Inventory statistics as of the beginning of January 2020 are expected to be published in the coming week.
The head-to-head numbers for December provide more than the proverbial grain of salt when one addresses price developments in Sarnia and Edmonton propane.
The OPIS-assessed Sarnia price dipped from 88.5cts/gal at the end of December 2019 to 70.875cts/gal on Jan. 13. The Edmonton price dropped from 45.125cts/gal, 6.5cts/gal higher than Conway, to 36.0625cts/gal, a nickel below Conway, over the same time frame.
The Sarnia market peaked at an average of $1.20/gal on Dec. 3. Edmonton was estimated as much as 10cts/gal over Conway on Dec. 13, and it hit its average outright high for the month the same day at 57.625cts/gal.
Informal trade feedback put this month's declines down to short-term factors. The warming trend in the days following Christmas is cited as one reason.
In addition, it was suggested that the return of railcars stranded by the short-lived Canadian National Railway Co. strike in November may have helped engineer (no pun intended) a smart dive for Canadian propane prices.
The Canadian safety valve isn't about to be choked off all at once. "I think most people are waiting for some demand to hit the market," one market source observed yesterday. "[Storage] is lower, for sure, but ... there are some sellers out there with Western Canadian barrels."
Nevertheless, overarching economic realities in both nations suggest that a Polar Vortex-like weather recurrence in the American heartland this February or March may leave Canada hard-pressed to come to the shivering consumer's rescue.
--Rajesh Joshi, rjoshi@opisnet.com
--Jessica Marron, jmarron@opisnet.com
Copyright, Oil Price Information Service
