Propane News

Weekly Inventory Results

11/14/19-U.S. propane/propylene stocks decreased by 2.5 million barrels last week to 97.7 million barrels as of November 8, 2019, 9.0 million barrels (10.2%) greater than the five-year (2014-18) average inventory levels for this same time of year. Midwest and Gulf Coast inventories each decreased by 0.9 million barrels, East Coast inventories decreased by 0.5 million barrels, and Rocky Mountain/West Coast inventories decreased by 0.2 million barrels. Propylene non-fuel-use inventories represented 4.9% of total propane/propylene inventories.



NPGA Propane Inventory Report Summary

October 2019

The October 2019 trend report.

Since the last monthly report, total U.S. propane/propylene stocks peaked on a weekly basis at approximately 100.7 million barrels (for the week ending 4 October) and have since fallen slightly, week-over-week, based on weaker supplies and stronger demand.  Further stock draws are expected as demand passes through its seasonal trough supported by colder temperatures, increasing exports, and grain/crop drying demand increases.

The monthly forecast and outlook for U.S. propane fundamentals and inventory levels have been modified.  The “Change from Previous Forecast” section in the October 2019 Summary workbook for the U.S. highlights and denotes this month’s forecast changes (in the US mthly rpt tab).  The IHS Markit estimates for monthly supplies from gas processing, refineries, and imports were lower than actuals reported by the EIA for the month of July leading to a lower stock build.  Adjustments to supplies over the forecast period were made, and these changes led to less net supplies and lower inventory levels as compared to the previous month’s forecast.  The forecast for the average days of forward supply for September 2019 through August 2020 was reduced from 45.8 to 44.8 days.  For now, IHS Markit does not expect significant changes to propane supplies from natural gas processing over the current forecast period ending in September 2020.

Changes are afoot to the U.S. propane balances as the global crude oil market has continued to show lengthening supplies against weaker demand as compared to previous forecasts for 2020 and 2021.  The likelihood of a U.S. upstream slowdown in activity and correspondingly lower propane production rates from natural gas processing could emerge in the latter half of 2020 and continue through 2021, one outcome from the length in the global crude oil market.

Over the past several quarters, growing supplies of U.S. natural gas and crude oil continue to outstrip demand leading to lower crude oil, natural gas, and NGL prices.  Lower prices are not providing the economic rents to support status quo and increasing activity from an upstream perspective across many of the U.S. plays and basins.  Over the past several quarters, the investment community has been challenging the U.S. upstream companies to improve operating margins and spend within cash flow.  On a go-forward basis, the U.S. shale gas and tight oil system will be facing its biggest test since the 2015 downturn with the twin burdens of weak prices and capital discipline weighing down production heading into 2020.  The IHS Markit price outlook for crude oil has correspondingly adjusted downward.

With WTI prices set to languish at around $50 per barrel ($/bbl) through 2020, crude oil output is expected to slow sharply.  U.S. supply surprised to the upside in the previous downturn in 2015 and 2016 by (1) doubling capital efficiency via operational and well performance improvements while having lower absolute base declines and (2) turning to very accommodative debt and equity markets to outspend cash flow.  Post the previous downturn, U.S. upstream productivity and most efficiencies have leveled off, and investor sentiment will no longer tolerate outspending cash flows. With neither of these options available for the foreseeable future, upstream spending will be cut quicker, and less productive upstream assets will be impacted from these cuts and their crude oil, natural gas, and natural gas liquids (NGL) production streams will fall faster.

Rig counts have been dropping precipitously throughout the first three quarters of 2019 in response to investor pressure and the above noted crude oil and natural gas market fundamentals.  The IHS Markit WTI oil price outlook for 2020 and 2021 is $52/bbl and $48/bbl, respectively, with the outlook improving only slightly to $55/bbl in 2022.  Under this price expectation, U.S. upstream operators will be pushed to a familiar cost cutting environment and doing more with less, reminiscent of 2017 pricing.  However, in 2017, the U.S. upstream industry received an additional $15 billion from investors to fund operations; this support is no longer available.

Thus, the next two years are likely to be more dire for U..S producers than what has been experienced thus far in the price downturn.  The outlook for propane and other NGLs as a byproduct of oil and natural gas production will follow and could lead to U.S. propane market tightness and lower days of forward supply for late 2020 and further into 2021 and 2022.  The situation will continue to be monitored and monthly U.S. propane forecasts adjusted accordingly.


 

 Factors Affecting Domestic Inventories

 Domestic propane supply is affected by primarily four factors (Exports, Petrochemical Demand, Crop Drying and Weather).  

  1. Exports - Exports have become one of the largest factors impacting inventories, especially in PADD 3, the Gulf Coast area.  As export terminals continue to be constructed in the Gulf Coast, this factor will play a larger role in overall domestic inventory.
  2. Petrochemical Demand – Since the domestic supply situation is improving with more production coming from the shale regions, petrochemical companies will continue to rely on natural gas liquids (NGLs) as their primary feedstock.
  3. Crop Drying – Agriculture continues to be the largest industry in the US.  Propane plays a critical role in removing moisture from crops to avoid spoilage in storage.  When crops have high moisture content, propane supply is affected significantly over a relatively short period of time.  In the fall of 2013, agriculture in the Midwestern states alone consumed over 325M gallons of propane.  This significant draw on supply did not allow inventories to recover all winter.
  4. Winter Weather – One of the smallest primary inventory sectors is PADD 1, which covers the Northeast and Middle Atlantic areas of the country.  Extended cold weather can have a significant impact on supply availability. Propane continues to be a primary fuel as a heat source in this part of the country.

 

Prebuys

When discussing prebuy options with our customers, it is our belief that you should sell what you buy and buy what you sell.  Most traders will readily admit that they cannot predict what the market will do.  As a retailer, we believe the same holds true.  When it comes to prebuy positions, you should be evenly hedged.  Prebuys can provide a nice hedge for those customers looking to lock in gallons and pricing for the year.  Please let us know if you are interested in this program.