Amid Winter Price Dip, Where Will 2015-2016 Prices Go From Here?
By Pat Thornton, Marty Lerum, and Jeff Thompson – Butane Propane News
In late December 2014, many retail propane marketers came to the realization that a dramatic move up in prices by the end of the current winter season was unlikely. Even as December wrapped up with an average price of 57 cents/gal. at Mont Belvieu, January would bring an even deeper dip into the mid-40-cent range. As of mid-January, retail consumer prices were holding strong, a sign that most retail propane marketers had made the decision earlier in the year to cover a high percentage of sales after the fiasco of winter 2013-2014, which saw a price spike to near 175 cents/gal. at Mont Belvieu and trading as high as $5.00 per gallon in the Conway market.
Once again, the most consistent recent trend in the propane market is that the retail propane marketer successfully employed the strategy that would have worked wonderfully the previous year. Indeed there was every reason to believe we were once again on a crash course with the same destiny, even through late summer as there had been many similarities to 2013 throughout the first half of 2014. Through much of the first half of 2013, inventory levels that were depleted in 2014 steadily climbed much more than analysts had projected. In the spring of 2014 we and many others believed that we would be hard-pressed to enter winter with much more than 55 million barrels. However, a production boom in the U.S. and retail marketer proactivity to cover positions helped assure there would be plenty of propane and the retail propane marketer would be price-protected with ample supply security.
As summer faded to fall, the notion of inadequate supply for 2014-2015 was quickly fading. The once-feared Oct. 1 supply level of 55 MMbbl turned out to be a healthy 80 MMbbl. Although propane continued to be exported at record levels, we were surprised several weeks in a row as expected Energy Information Administration inventory draws were very small or were actually builds. Retailers were not alone continuing to think that prices could not go much lower. Seasoned analysts were right there with them.
The breakdown in the propane price came in tandem with the fall of crude oil, gasoline, and other energy commodities. The shale boom in the U.S. has brought production of crude oil to new highs and caused OPEC countries to continue to fight for world market share outside the United States. Qatar believes a global surplus of 2 MMbbld now exists as the U.S. has been producing 9 MMbbld and as OPEC exceeded its 30-MMbbld target for the seventh straight month in December. Prices continued their decline after Nov. 27 when OPEC members met, but failed to cut production. OPEC members such as Venezuela that rely heavily on crude oil revenue to support their social programs continue begging for a production cut to try to push prices back up, but Saudi Arabia and the majority of OPEC member countries believe they will ultimately slow crude oil production in the U.S. by eliminating the profit potential.
Goldman Sachs believes it will take crude oil at $40/bbl for six months to significantly slow producers, and that Saudi Arabia and other OPEC members will keep their production strong through the second half of 2015. In the first week of 2015, we did see 35 horizontal rigs idled in places such as North Dakota’s Bakken Shale and Texas’ Permian Basin. That was the single biggest weekly drop since the drilling boom started six years ago. As more rigs go idle, we may see a small push up in prices begin to take effect.
What goes down ultimately will go back up. As we look back at the past 25 years, we see four periods where a major price drop occurred:
In 1990, Mont Belvieu propane peaked in January at the monthly average price of 45 cents/gal., while the April price averaged 22 cents. That was a decrease of 23 cents, 51%. And, Conway was down 62%. This propane price spike to 45 cents was caused by a polar vortex that came down in December 1989 and covered the eastern half of the U.S. long enough to freeze wellheads, cut propane production, and cause supply disruptions. By November of 1991, following the Gulf War with Iraq, prices were back up to 43 cents.
In 2008, Mont Belvieu propane peaked with the July monthly average at 186 cents/gal. and bottomed out in December at 61 cents. That was a decrease of 125 cents, down 67%. At the same time, Conway was down 61%. The world then faced a financial meltdown and all commodity prices tumbled as companies and people scrambled to turn everything they had into cash. Crude prices peaked at $147/bbl and then dropped to $32, down 78%, in 2008. By December 2009, propane prices steadily corrected back to an average of 120 cents/gal. at Mont Belvieu.
Most recently, in 2014, Mont Belvieu propane peaked with the January monthly average at 141/cents gal. and ended the year with a December average of 57 cents. That was a decrease of 84 cents, down 60%. Conway was down 74%. As 2015 began, prices continued lower into the 40 cents/gal. area at both Mont Belvieu and Conway. If one looks to history for guidance, it may be presumed that a rebound by the end of 2015 is likely. As the production of crude and natural gas continues to decelerate, or be shut in, due to economics the firming of prices is very likely as the year progresses.
On the positive side, if there was ever a time of limited downside potential, we are there now! Putting in pieces for winter 2015-2016 makes sense at these price levels.
Energy traders have been trying to pick a floor for crude oil recently as they see huge technical support in the $43/bbl range that could trigger a push back up to the $80/bbl range by late 2015 or early 2016. Weaker OPEC members and Russia are producing at maximum capacity trying to make as much money as possible to meet budget demands. Smaller crude producers working with borrowed money are now seeing negative cash flow, and will be selling off assets to larger producers with stronger balance sheets as banks scramble to recover their loans.
Propane exports from the U.S. have been coming under pressure with exporters selling propane at losses of up to 7 cents/gal. versus paying 10 to 14 cents on their “Take or Pay” agreements with ship loading facilities. If we see propane exports drop substantially we could see propane production shut in at the wellhead. Producers of natural gas liquids are losing money on ethane and propane in many areas and are still producing because of higher prices for butanes and natural gasoline. As butane prices decline after the winter gasoline blending season, this will affect production economics, i.e., more production shut in.
Since 2012, the propane percentage price to crude has hit 35% of the value of crude oil six times and each time the propane price then jumped higher versus crude oil. Propane hit 35% yet again in December 2014. Prior to 2012, propane traded closer to 70% of crude oil until the U.S. became a net exporter of propane. We have noticed that every time the price of propane hits 35% of crude, a lot of demand surfaces and prices move back up.
Many factors will cause some volatility in the propane marketplace in the coming weeks and months. There may be limited downside from here, but there are also factors that can pull prices up. History has shown us that after a move down like we saw in 2014 it is not surprising to see prices higher by the next winter season.