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Searching For a New Normal in Propane Markets

July 14, 2016 | By Sam Duran

Propane markets over the past few years have been defined by an abundance of supply and a constant (and sometimes desperate) search to place growing volumes of propane coming from gas processing plants. Since the frigid winter of 2013/2014, Mont Belvieu propane prices have swung from as high as 78% of West Texas Intermediate (WTI) crude prices, to as low as 24% of WTI last summer.

The chart below shows how weak propane prices have been relative to crude over the last year, but it also shows propane prices returning closer to recent historical averages this summer. This issue of Get the Point will discuss the drivers behind these movements, and we will take a deeper dive into how structural changes in propane demand have taken propane prices back from the brink.

Propane % of Crude Oil - Seasonal

Welcome to the New World of Excess Export Capacity

U.S. propane exports have been a big part of dealing with the propane supply surplus for quite some time, but the extent to which propane volumes are leaving the U.S. today is unprecedented.

According to Waterborne, a subsidiary of IHS, propane exports have increased 46% year-to-date in 2016 vs. the same time period in 2015. Projects from Targa and Occidental in late 2014 and 2015 have helped to drive the increase in propane export volumes, and the push to over 1 million barrels per day of capacity has been driven by two recent expansions of Enterprise’s LPG export terminal in 2015 and the build-out of Sunoco’s Nederland terminal. Enterprise claims its LPG export terminal is currently fully contracted.

As the Waterborne data suggests, propane export volumes have ramped up in line with capacity. June, in particular, was a banner month for exports, with volumes well above 900,000 barrels per day (Mb/d) according to Waterborne. To put this volume in perspective, the U.S. Energy Information Administration (EIA) reported average propane export volumes in 2015 were just 616 Mb/d.

While a new normal in export volumes is undeniable, this ramp up has been anything but smooth. EIA data for exports (see graph below) shows how volatile export volumes have been, swinging from above 800 Mb/d during the past winter to below 700 Mb/d in the early spring.

Propane/Propylene Exports

Terminal operations and Houston Ship Channel traffic issues remain as important as ever. With the Panama Canal now expanded, the U.S. can now deliver LPG to Asia at a lower landed cost. Meanwhile, exporters still must consider risk factors like weather in countries that use LPG for heating fuel, pricing of competing feedstocks and relevant cracker co-products internationally.

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Operating rates of international crackers and notoriously finicky propane dehydrogenation (PDH) units will increasingly play their part as well. With an average 45% of U.S. production of propane exported in 2016, international risks and uncertainties are increasingly relevant. 

Risks aside, propane exports are on track to grow tremendously in 2016. This has already led to significant changes in other key sectors of propane supply and demand, but before we get there, let’s first take look at a key indicator in the propane market, propane inventories.

EIA Propane/Propylene Inventories No Longer Setting Records

Until recently, every weekly EIA propane/propylene inventory report since late 2014 has set a new all-time record high for its respective week. However, this trend might have started to end last month. The weekly inventory report for the week ending June 3 was below the inventory level for the same week in 2015, and the weekly inventory has remained below the prior year in each week since then.

To some extent, it was inevitable that inventories could not continue to set records every week. The rapid propane/propylene inventory buildout in mid-late 2015 would eventually be baked in to the prior data. But any retreat from the record is still significant, given the fact that propane/propylene inventories came out of winter 5.4 million barrels above those in 2015. The chart below shows how propane inventories have come back in line with last year’s levels.

EIA Weekly Propane/Propylene Stocks

By historical standards, having 84.8 million barrels of propane/propylene in storage in July is still extraordinarily high. But looking at inventories in the context of growing export demand might shed some light in why propane prices have been able to return to levels relative to crude not seen since before 2014. One way to do this is look at the days of supply available in storage (see graph below). This calculation takes propane inventories and subtracts demand (including exports).

Days Supply in Storage (Propane/Propylene)

While days of supply is not the perfect barometer of propane markets, we can see a far more neutral picture of propane supply than we see looking at inventories alone. Current days of supply are more in line with 2013 levels than 2015 levels; and in 2013, we saw propane prices average 42% of WTI over the summer.

Changes in Local PDH and Cracker Demand Likely to Offset One Another

The chemicals markets both in the U.S. and abroad have been and continue to be important outlets for growing propane supplies. Although to a lesser extent than we see in exports from the U.S., new PDH facilities from Dow and Enterprise promise to add some additional demand for propane in order to make propylene. Dow’s 30 Mb/d project began commercial operations this past December, and Enterprise’s 35 Mb/d PDH unit is expected to start up Q1 2017

Of particular importance to the oversupplied propane market has been the ability of flexible ethylene crackers to switch from other feedstocks, like ethane, to propane. The decision to consume one feedstock or another is determined a number of factors, including the cost of feedstock, the amount of ethylene that the feedstock yields and the value of co-products that are produced when the feedstock is consumed in a cracker. For example, according to William Leffler’s Petroleum Refining in Non-Technical Language, 1 lb. of ethane yields 0.77 lb. of ethylene and .01 lb. of propylene in a cracker, while 1 lb. of propane yields 0.40 lbs. of ethylene and 0.18 lbs. of propylene. While there are several other co-products at play in cracker economics, this shows the point that the relative prices of propane and propylene are crucial for propane cracking economics relative to ethane.

Since late 2014, cracker economics have been such that propane cracking margins have been roughly equivalent or favored compared to those of ethane, according to IHS data. This has taken place despite falling propylene prices in 2015 vs. 2014, which have come under pressure due to increased propylene supplies from refineries and new PDH capacity in the U.S. and globally, among other things. That said, with stronger propane prices of late and continued downward pressure on propylene, propane cracking economics have become weaker this summer on average. IHS's short term NGL outlook calls for propane use in ethylene crackers to be at least 15% lower in second half of 2016 vs. the second half of 2015.

Supply Holding Up Relatively Well

In our recent Get the Point"Propane Exports are Taking Off, Can Supply Keep Up?", we studied trends in propane supplies in detail. Despite weak oil and gas drilling economics and plummeting rig counts, propane supplies have been holding up relatively well thanks to combination of stronger supplies from the Northeast, North Dakota and the Rockies offsetting declines in PADD 3. Using EIA data and Pointlogic’s daily supply model, we see gas plant propane supply up 7% year-to-date 2016 vs. the same time period in 2015. That said, recent processing plant issues at Sherwood in West Virginia and Pascagoula in Mississippi will weigh on propane supplies in the near term.

Of course, gas plant supply isn’t whole story. According to IHS, propane/propylene supply from refineries has increased nearly 30 Mb/d on average in 2016 compared to the same time period last year. Last year, when propane prices were at their weakest, there were regions in U.S. where propane prices were competitive with gas prices on a $/MMBtu basis. At this point, a refinery could opt to consume propane in place of natural gas as a fuel. Thus for much of last year, volumes of propane were consumed at refineries instead of sold for consumption elsewhere. As propane prices have strengthened relative to both crude oil and natural gas over the past year, less propane is now being consumed at refineries, thus increasing reported propane production volumes.

Wrap Up

The U.S. propane market continues to adapt and evolve in light of new supplies associated with the shale revolution. The propane market has seemingly pulled itself back from the brink with a combination of a slowdown in supply growth and rapid ramp-up in exports. Since early June, inventories have stopped setting records, and propane prices have recovered as a percentage of crude. With relatively strong propane prices and new supplies continuing to weigh on propylene markets, we can expect less incentive to crack propane in the near future.

With the buildout in export capacity seeming to have met the market’s needs for the time being, the U.S. propane market might be zeroing in on a more balanced position once again after a tumultuous past year. Certainly the market sees new risks and uncertainties with greater connectivity to global markets; however, the market also has realized the reduced possibility of containment issues and a glimmer of price opportunity to the upside if a cold winter were to materialize.

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