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UPDATE: Propane inventories headed for four-year lows on rising exports
HOUSTON, August 30, 2017 (PCW) -- One of the reasons for the recent strength in spot propane prices is market players’ fears over adequate supplies going into the winter heating season. Between robust exports and increasing petrochemical demand, weekly inventory builds have been regularly underestimated by several analysts.
NGLs Week will, over the next two weeks, look at how tight supplies could get ahead of winter and how that could impact spot prices.
To first understand why inventories have not been building at historical rates, it is important to look at the demand profile of propane. Propane’s largest demand source (about 47%) has been for exports followed by heating (28%). This share of the overall demand slate for exports is expected to increase from last year’s levels due to aggressive demand from Asia, in particular from new PDH units in China and rising flows to India on the back of expected lower supplies from the Middle East.
The result of this added demand has been that propane inventories, as per EIA data, are at their lowest levels since 2014 for the same time frame. With a little more than two months left in the historical build period, several market players are growing understandably nervous about supply tightness. Below, NGLs Week has extrapolated where inventories could end up by year’s end just by using historical inventory build data for three- and five-year averages (See 2017 est1 and 2017 est2, in above graph).
Given these admittedly conservative estimates, inventories could end up at year’s end at four-year lows. EnVantage is more aggressive, calling for propane stockpiles to be around 56 million barrels in the last week of Dec (See EnVantage, page 3), which would be a level last seen at end-Dec 2013, according to EIA data.
In the past, relatively low inventory levels have had mixed impacts on spot prices as other factors, such as plummeting crude, have appeared to exert a heftier effect. In the next instalment, NGLs Week will examine how the market could react in the peak winter season.
Updated information below
The impact on spot propane prices, meanwhile, is intriguing: while forward values for the winter package (Nov-Mar) are coming in on average about 0.8 cpg below last year’s average, the package has been rising steadily since the build season began.
The Nov 2017-Mar 2018 forward winter strip was assessed at 62.6 cpg in early Apr, rose to 64.3 cpg in early Jun and came in on Friday at 75.6 cpg, effectively a 20.8% increase since stockpiling season began. Essentially, the smaller builds have stoked concerns of sufficient supplies going into the winter season and those concerns are being priced into the winter strip (note that winter heating demand is the second largest demand source for propane).
With about two months left in the build season, it appears unlikely that inventory builds could catch up to the pace of prior years. Should that be the case, the propane winter strip could strengthen further, surpassing last year’s average.
At its current value of 75.6 cpg, it already challenges levels last seen in the chilly winter of 2013-14 (126.9 cpg on average). Forecasts for this winter are calling for normal to below-normal temperatures, particularly in the major consuming regions of the Northeast and Midwest, which is likely to provide further support to propane prices.
Rising production (propane supply levels hit an all-time high of 37.537 million barrels, or 1.211 million b/d in May) and declining exports, however, could counter further price increases going forward. But several analysts, including PCW’s content partner EnVantage, are calling for inventories to end the year at multi-year lows and are forecasting that a spike in propane prices is highly likely once temperatures dive. -- Samantha Hartke