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Propane weakens despite record cold on production, bearish positions

HOUSTON, January 17, 2018 (PCW) -- Gulf Coast spot propane prices have been steadily weakening so far this winter – an atypical dynamic during the peak of the heating demand season. From Nov 2017 through Thursday, spot propane prices have fallen 5.625 cpg, or 5.9%.

While spot prices have declined in prior winters, these previous fall-offs (seen in the winter 2014-15 and 2015-16 seasons) can be attributed to mild weather and lower demand for heating, as well as a softer crude price environment. The fact that so far this year, propane has weakened despite rallying crude and heating demand is nearing levels last seen during the polar vortex of 2013-14, is noteworthy. During the 2013-14 winter event, spot propane rose nearly 49% to a high of $1.7025/gal in early Feb 2014.

In recent weeks, a major LPG player has been seen putting heavy volumes on the spot market, ultimately weighing down the front-month. At the same time, brisk spread trading has been seen throughout the various 2018 packages, which has narrowed quarter-on-quarter premiums and outright values through 1H 2019.

Sources also noted there were heightened expectations of tighter inventories going into winter, resulting in heavy buying of winter packages in 2Q 2017.Effectively, some of the winter premium had been priced in way before the season actually hit and now several market players are ‘selling the fact’ after ‘buying the rumor.’ (To read NGLs Week prior analysis of propane winter prices, click HERE).

Another major bearish factor is production, which hit a fresh high in Oct at 39.279 million barrels (1.27 million b/d). Year-to-date production in 2017 is up 4.4% from the comparable year-ago period. Another is that while this winter has indeed been frigid, it has yet to match the multiple winter storms seen in 2013-14. Still, propane demand in 2017 has been quite bullish, especially in light of record export levels. Exports for 2017 through Oct have shown a 15.7% increase over year-ago levels; weekly transported cargoes upward of 1 million b/d has become the norm.

However, to maintain such robust export levels, Gulf Coast prices need to be at levels where arbs are extremely attractive. With propane in the upper 90s cpg level it was proving too costly relative to crude. Indeed in the latter part of 3Q, propane came in at 78.1% relative to crude, an all-time high since PCW began assessing NGL prices in 2007. This high point came largely due to rampant exports. (To read NGLs Week prior analysis on propane prices’ relationship to crude, click HERE).

One argument to be made as to the weakness of Gulf Coast propane prices is that attractive levels need to be met to sustain this high level of exports, and 90 cpg prices in a $60/bbl-plus environment is deemed to be attractive. It is apparent that exports are now the driving factor behind LST price movements. -- Samantha Hartke

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