US propane prices starting to get dragged down by the shale boom

The continuing new paradigm in the relationship among various streams of US crudes, and between crude and natural gas, is logically pulling in its next rearrangement: propane.

As Platts Anastasia Gnezditskaia reported recently, the spread between natural gas and propane has narrowed to its lowest level in two years. She quotes a report by analyst Steve Smith, who noted: “(A) near-record mild 2011-2012 winter and the sharp increase in NGL-targeted drilling has led to very high propane storage levels and more than a 50% contraction in the NGL-to-Henry Hub price ratio,” Smith said. “The highest ratio was at $9.50/MMBtu on June 2012, while now it is around $2.50/MMBtu.”

So that means that propane is moving toward the price of natural gas. But the other relationship that’s shifting at the same time is that of propane to crude oil in the US, with crude moving well above that of the liquid.

Converting propane’s cents per gallon prices to barrels, and comparing that to the price of WTI, shows that the spread between the two started 2012 at a $44.65/b spread in favor of WTI. Through the prices of a few days ago, that spread had blown out to $58, and hasn’t been less than $50 since mid-November.

Outright spreads don’t always tell the whole story of a changed relationship, because an overall rise or fall in absolute prices can make spreads look narrower or wider even as the percentage relationship between the two doesn’t change much. But that’s not the case between propane and WTI. It opened 2012 with non-LTS propane at Mt. Belvieu at roughly 56.6% of the price of WTI. By the end of the year, it was about 37% of WTI, and had been as low as 35%.

This isn’t really a surprise. US NGL production is surging on the backs of the shale gas boom, and it isn’t likely to taper off. Platts reporting noted that FBR Capital Markets has projected US liquids output growing 9.7% to 2.776 million b/d in 2013, and then tacking on close to 10% the year after, and 8.7% in 2013. The jump in 2012 was 12.9% to 2.530 million b/d.

The problem, as always, remains takeaway capacity, which inhibits the normal forces to economics from readjusting supply. Exporting propane will rise; our friend Rusty Braziel had a good summary of the various projects on the drawing boards that will make that happen.

As we noted in a recent blog entry, exports of NGLs surged to a record high in October, the last full month for which data is available. And all you need to do is look at the spread between European propane and US propane to see why.

US propane as % of WTI: Jan 3, 2012 - Jan 3, 2013

Converting the Platts CIF NWE propane assessment to cents per gallon, it shows that at the start of 2012, the gap between European propane and Mt Belvieu non-LST propane was 25 cts per gallon. It got as wide as about $1.25/gal at the beginning of December, before retreating to 80 cts recently. Even with the contraction of the past weeks, that’s still a large incentive to move propane off the US shores and into Europe or other markets. (If you don’t like dealing with numbers, all you need to know is that European propane is at or slightly more than the price of Brent; US propane is significantly less than price of WTI, which in turn is now running about $20/b less than the price of dated Brent.)

Based on recent data, the export rise has begun. And given the ongoing infrastructure construction, it’s only going to grow.


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Comments

  1. John Kingston at January 4, 2014 9:33 am

    Jack, you clearly went pretty far back in The Barrel to find this. There’s no sentiment either way. And in fact since this was written, propane exports have soared, as projected; see my blog post from December 30. They were at a record in October. Platts never takes views on whether a dropping price is “good” or “bad.” And in fact we try to stay away from saying things like natural gas had a “good” year in 2013 because it rose a lot. The fact is for every long there’s a short, so the net effect of a rise or fall in prices is zero, in terms of market profits and losses.

     
  2. Jack at January 3, 2014 9:30 pm

    Am I mistaken or reading this wrong? Is there a sentiment here that a dropping propane price is a bad thing or that an increasing price is a good thing?

     
  3. Cheaper Propane Online Services at July 18, 2013 5:39 am

    Great to know that propane prices have been declining in the past few days. Well written site! Good work.

     
  4. J W at February 6, 2013 8:36 pm

    While propane prices are lowered, other NGL are sustaining quite well. See:
    http://www.eia.gov/todayinenergy/detail.cfm?id=9590
    Even propane has recovered quite a bit, see:
    http://www.eia.gov/petroleum/heatingoilpropane/

     
  5. Mick Barry at January 10, 2013 12:25 am

    They’d sell a lot more US propane offshore if they put the pricing in a language the rest of the world could understand.
    eg Instead of the olde world – gallons and pounds, use litres and kilos.
    Better still price it as US $ per tonne so that a comparison is obvious with the
    benchmark Saudi Aramco value.

     

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