Winter Wounds Still Fresh, Propane Dealers Face Next Year’s Unknowns

U.S. propane dealers will likely take action in the coming months to accumulate physical supply and avoid a repeat of last winter’s unprecedented fuel shortage. But, while futures market conditions make it economically viable to store barrels, a change in weather patterns makes no guarantee on forward demand.

Such was the propane market landscape presented last week at the Atlantic Region Energy Expo in Atlantic City, N.J., by Elaine Levin, president of Powerhouse, a risk management firm specializing in profit margin protection.

After the shortages of last year, Levin expects dealers will be long wet barrels going into winter.

“Everyone remembers, vividly, the problems with supply from last year,” Levin said in a follow-up telephone interview Monday. “We have a tendency to fight last year’s battle. It’s human nature.”

In the first month of 2014, a bullish supply/demand mix sent Conway spot propane soaring over $4.30/gal, while Mt. Belvieu prices topped $1.70/gal.

Propane dealers scrambled to find fuel amid numerous outages. The Department of Transportation granted waivers in the Midwest and on the East Coast to extend the number of hours fuel delivery drivers could be on the road. President Obama recently signed a bill guaranteeing such extensions through May 31.

“People were driving great lengths — New England to North Carolina — to pick up supply,” Levin said. “That’s something no one wants to do again.”

The message from her firm’s customer base of dealers is that it plans to head into the coming winter with more fuel on hand.

Supplies are still lagging. U.S. propane and propylene inventories were 31.5 million bbl. in the week ending April 25, the Department of Energy reported last week, 9 million bbl. shy of last year’s levels.

But, the forward curve is now in contango, a market condition that could encourage storage to be filled, Levin noted in her AREE presentation.

On Monday, TET May spot propane was assessed around midday at $1.05375/gal.   Earlier in the day, Q4 2014 material was done at $1.08875/gal.

It’s not an enormous carry, Levin noted. But, once various costs are factored in, it may encourage those who have storage to use it.

However, despite such preparations, a problem still exists.

One of the factors that sent propane prices flying last winter was the advent of blisteringly cold weather that spiked heating demand. This year, weather could again be a wildcard — but one of a different suit.

An El Nino watch has been issued by National Oceanic and Atmospheric Administration, Levin noted in her presentation. El Nino is a cyclical warming of equatorial waters in the Pacific Ocean that affects weather patterns around the world. They also tend to be bearish for winter weather demand in the U.S. Midwest and Northeast — prime home heating areas.

The size of the warm water being tracked is considerable, Levin said in Monday’s phone interview. Echoing her observations, a May 5 Reuters report noted an Australian climate scientist’s view that a rise in Pacific Ocean temperatures and the rapid movement of warm water eastward have increased worries that this year’s El Nino pattern could be one of the strongest in several decades.

To get ahead of such uncertainty, Levin is suggesting dealers that want to accumulate physical supply going into winter consider a “put option” for the fall or winter months. That’s an option on the futures contract analogous to insurance against prices falling.

Levin additionally noted in Monday’s interview that the train of exports of propane from the U.S. Gulf Coast to points abroad remains a factor in the market overview.

The arb window is open, Levin said, though she noted that spreads are not tracking quite as wide as last year. The margins are not as hefty.

“It remains a feature of the markets that we have to continue to monitor,” Levin said.

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