After a solid month of growth, propane prices retreated at both the Mont Belvieu, Texas, and Conway, Kan., hubs the first full week of October. It was not a matter of if, but when, this would occur as the current supply-demand dynamics cannot support a sustained price rally for propane.
Though propane inventory levels experienced withdrawals in early fall, the industry was still on track to reach record levels by the end of the season. This will limit the growth that prices can achieve this heating and crop-drying season. In addition, demand for crude and NGL volumes may be hampered by underachievement out of China as it was reported that September manufacturing activity fell to a six-and-a-half year low.
Unfortunately, the crude market remains very uncertain with nearly as many claims that can support a price increase as can support a further downturn. On the downward side, China’s economic outlook is unclear, and it is expected that Iranian crude will further flood an already oversaturated market once trade sanctions are lifted against the country.
The more optimistic viewpoint is that both current and forward prices will not support production and will need to be corrected. In addition, propane inventory levels may be closer to historical norms than most would think given the aforementioned expectation for record levels being reached.
Jefferies Group LLC wrote in a recent research note that propane storage was 51% above its seasonal five-year average in July, but if this were divided by the trailing 12-month average daily demand and exports, it was only 11 days above the five-year seasonal average.
End-user demand for propane has arrived earlier this year due to the attractive prices available ahead of demand season, which has resulted in earlier withdrawals from storage. Jefferies stated these early withdrawals combined with increased LPG export capacity and propane dehydrogenation plant additions in 2016 may bring propane inventory levels back to normal levels sooner than later.
Meanwhile, ethane margins have reached fractionally positive levels at both hubs as the impact of widespread rejection continues its slow burn to rebalancing the market. Though this rebalancing won’t take full effect until 2018 when more ethane cracking capacity come online, prices are expected to increase in the coming months to encourage rejected supplies to make their way to Gulf Coast crackers that are experiencing a drop in incoming supplies.
The outlook for crude is still mixed, but there are growing sentiments that fundamentals are improving even as the short term looks hazy.