Cash prices for propane in America's major NGL trading hubs have surpassed a dollar a gallon, as concerns over having sufficient stocks during fall crop-drying and the 2021-2022 winter come into focus.

These worries are heightened in the U.S. Midcontinent, causing propane at Conway, Kansas, to trade around parity with prices in the larger Mont Belvieu hub in Texas.

Some trade watchers expect Conway propane to rise to a premium over Mont Belvieu by this autumn, to prevent higher prices in the southern hub from siphoning away supplies that the American heartland cannot afford to lose at a time Canadian rail shipments could also decrease because of higher seaborne exports from British Columbia.

Though the current crude oil rally is an underlying reason for higher propane prices, the propane-WTI price ratio has also increased to 59% from 56% at the end of May.

Benchmark propane prices in the three major Mont Belvieu cavern systems (Energy Transfer, Enterprise and Targa), published daily in the OPIS North America LPG Report, all began June 23 above $1.00/gal and recorded full-day averages higher than $1.01/gal every day from June 23 through June 25.

Conway propane also topped $1.00/gal on an intraday basis on June 23 and closed at $1.03/gal on Friday compared with $1.03625/gal for Mont Belvieu Energy Transfer and $1.033125/gal for Mont Belvieu Enterprise.

Trade in Mont Belvieu began this morning (June 28) around $1.0375/gal, and in Conway at $1.035/gal.

These increases came as the Energy Information Administration (EIA) last Wednesday reported nationwide propane stocks of 56.2 million bbl as of June 18, 21.2% lower than the year-ago level. Stocks in PADD 3 (Gulf Coast), the region that ships out more than three-fourths of waterborne U.S. exports, of 31.6 million bbl, stand 28.2% lower than a year ago. The PADD 2 (Midwest) figure of 15.3 million is 10% lower than last year, and 22% lower than the five-year average for this week.

OPIS TimeSeries, an exclusive price database stretching back to 1984, shows Mont Belvieu propane last traded above a dollar on a sustained basis between Aug. 24, 2018 and Oct. 10, 2018. A one-day spike above $1.00/gal was seen on Feb. 18 this year during Winter Storm Uri.

Dislocations caused by Uri also enabled Conway propane to trade between $1.16/gal and $1.4125/gal from Feb. 16-26, but the price reverted to a traditional discount under Mont Belvieu at the beginning of March.

This discount tightened from a nickel in March to around a cent in early June.

Trade sources attribute this to a PADD 2 need to keep the north-south arb uncompetitive, to prevent local barrels from escaping as exports via the Gulf Coast.

Three factors suggest a continuing increase in U.S. propane prices: (a) cyclically low stocks; (b) plateauing production; and (c) resiliently high exports.

EIA four-week rolling average data show total U.S. propane production steady around 2.3 million b/d during the first and second quarters of 2021, except a three-week decline in February and March when Uri temporarily sidelined some Mont Belvieu fractionators. Though the 2021 second-quarter average is higher than a year ago, it is below the 2.4 million b/d being produced immediately prior to the COVID slump in spring 2020.

On the export front, IHS Markit Waterborne data show total U.S. propane exports for calendar 2019 at 381.14 million bbl, or 1.04 million b/d. In 2020 -- a year when reduced Middle East LPG output boosted U.S. exports -- IHS Markit shows 438.64 million bbl exported, or 1.2 million b/d.

First quarter 2021 exports add up to 112.44 million bbl or 1.25 million b/d.

For January through May 2021, the total is 194.94 million bbl, or 1.3 million b/d. The provisional June total published by IHS Markit on June 24 is 45.51 million bbl, or 1.52 million b/d.

Many factors have helped this robust performance, including U.S. dock expansions in 2019-2020 that alleviated some infrastructure constraints. But Asia, which absorbs nearly two-thirds of U.S. propane exports, has played and will continue to play a big role.

A dip in very large gas carrier (VLGC) freight in late spring this year appeared to snuff out OPIS-reported cargo "cancellations" (aided perhaps by spot re-bookings of "cancelled" term cargoes). A rise in the Far East propane price (and the forwards curve) during June, helped by pricier crude oil and robust Chinese PDH demand, has kept the Asia arb open and also supports the case for continued strong U.S. exports.

Against this overseas demand pull, domestic U.S. needs remain constant and non-negotiable. En*Vantage Inc. in April had predicted a "train wreck" when the market woke up to this reality.

En*Vantage wrote over this weekend: "There is simply not enough U.S. propane to comfortably meet international and domestic needs for this winter. There will be a tug-of-war between the Gulf Coast and the Midcontinent for supplies.

"As the third quarter begins, propane retailers and large customers in the Midcontinent need to secure supplies earlier than they normally would as the supply chain could be significantly constrained this winter if crop-drying season is greater than normal.

"Bottom line -- propane prices still have more upside and net export margins will eventually have to go negative to significantly reduce exports. We could easily see Mont Belvieu prices between $1.05/gal and $1.10/gal by the second half of July and over 60% of WTI. Buckle up because it is going to get interesting over the next several weeks."

 

--Reporting by Rajesh Joshi, rjoshi@opisnet.com;

--Editing by Michael Kelly, michael.kelly3@ihsmarkit.com

Copyright, Oil Price Information Service