Dan Lippe
Petral Worldwide Inc.
Houston
When industry historians review market developments 5 or 10 years from now, they may declare 2009-11 was a major turning point in the history of propane markets in North America. On the other hand, they may conclude this period was an anomaly.
No matter how history decides to judge 2010-11, propane markets experienced developments that promise to have substantial impact on the coming winter heating season. For the immediate future, the shipment of substantial volumes of exports from Houston Ship Channel export terminals was one of the most significant developments during the first three quarters of 2011.
Historically, feedstock demand for propane has been an important and predictable balancing element for the overall propane supply-demand balance in North America. When colder weather pushed sales and consumption in the retail markets steadily higher, ethylene producers in the Gulf Coast generally reduced consumption and effectively offset some or all of the impact of a winter demand. These counterbalancing trends helped keep the overall market in balance. Similarly, feedstock demand generally recovered beginning in March or April as sales and consumption in retail markets fell sharply during March through June. |
Finally, the problem of overstatement of propylene content in refinery propane-propylene production as reported to the US Energy Information Administration plagued propane supply statistics throughout 2010. We concluded this problem worked itself out after January-February 2011 based on detailed analysis of by-product propylene production relative to FCC unit feed rates.
Feedstock demand
Feedstock demand for propane was 320,000 b/d in second-quarter 2011, about 25,000 b/d higher than in first-quarter 2011 and consistent with typical seasonal patterns. Demand in second-quarter 2011 was also 62,000 b/d (24%) higher than demand in second-quarter 2010. Demand averaged about 300,000 b/d in third-quarter 2011, about the same as in 2010.
Propane's share of fresh feed averaged 19.9% during second-quarter 2011 and 18.0% during third-quarter 2011. For third-quarter 2011, feedstock demand was 300,000 b/d and propane's share of fresh feed was 18.0-18.5%. Again, propane's share of fresh feed was below the 2005-07 range of 19.5-22.0%.
Consistent with the ongoing growth in ethane supply and feedstock demand, propane's share of fresh feed during second and third quarters 2011 was less than that for the 2005-07 average of 20.7%—an example of the historic transitions that have been under way since 2009.
Ethylene producers continued to enjoy strong profit margins and total production in second and third quarters 2011 was 2.0% higher than in second and third quarters 2010. Ethylene industry operating rates slipped to 89% in second-quarter 2011, compared with 90% in first-quarter 2011. Operating rates improved to about 91% in third-quarter 2011.
Some indicators, however, point to slower economic growth rates during fourth-quarter 2011 and first-quarter 2012. We forecast ethylene producers will operate at 88-90% of capacity during fourth-quarter 2011 and 86-88% during first-quarter 2012. On this basis, we forecast total demand for fresh feed will average 1.58-1.60 million b/d.
Propane's use as a space-heating fuel in residential-commercial begins to decline sharply from its seasonal peak each year in March. Residential-commercial propane demand began to increase in September-October and will probably reach its peak during December-January. Most likely, demand will be about the same as during winter 2010-11 but there is always the possibility of a colder or warmer winter and higher or lower demand. |
Based on the conclusion that propane availability will be tight at the beginning of winter 2011-12, we forecast feedstock demand for propane will average 220,000-240,000 b/d in fourth-quarter 2011, or 60,000-80,000 b/d lower than in third-quarter 2011 and below fourth-quarter 2010. Our forecasts indicate propane's share of fresh feed will average only 14-15% in fourth-quarter 2011.
Most likely, any rebound in feedstock demand in first-quarter 2012 will be weak by historic standards. Fig. 1 shows historic trends in ethylene feedstock demand for propane.
Retail demand
We estimate retail demand for second and third quarters 2011 was 190,000-252,000 b/d. The average for 2007-09 was 274,000 b/d. The decline compared with the 3-year historic average is consistent the decline in residential-commercial sales that began in 2003.
Demand increases as heating-degree days increase. Historically, September marks the beginning of the steady seasonal increase in heating-degree days, according to data published by the National Weather Service Climate Prediction Center.
For September 2011, heating-degree days were below the 30-year average for New England and the Middle Atlantic but above average for the upper Midwest. These two regions are the largest markets for retail propane sales, and winter weather in these areas will have a disproportionate impact on total US retail sales.
We forecast total retail sales will average 760,000-780,000 b/d for fourth-quarter 2011 and 1.025-1.050 million b/d for first-quarter 2012. Retail demand during winter 2011-12 will total 160-170 million bbl.
Exports
Spot prices in international markets maintained premiums of 20-30¢/gal, compared with spot prices in Mont Belvieu in April and May. Premiums narrowed to 10-20¢/gal in June, however. Although price incentives narrowed, exports from the US Gulf Coast remained robust throughout second quarter and averaged 134,000 b/d (12.2 million bbl), according to EIA statistics.
Exports from the Gulf Coast were 3.9 million bbl more during second-quarter 2011 than during second-quarter 2010. The combination of year-to-year increases in exports and feedstock demand equaled 9.4 million bbl in second-quarter 2011.
For third-quarter 2011, exports and feedstock demand were about the same as in 2010. This historic transition to sustained high volumes of exports from the Gulf Coast began in 2009 and exports for second and third quarters 2011 were 95,000 b/d (17.5 million bbl) higher than 2005-07 averages.
Pricing incentives for exports from the US Gulf Coast narrowed during third-quarter 2011. In July, spot prices in the Middle East were only 3-6¢/gal higher than prices in Mont Belvieu, but premiums in Algeria remained strong at 16.3¢/gal. Middle East prices were unusually weak during August and September, and spot prices slipped to discounts of 1.5-4.0¢/gal, compared with spot prices in Mont Belvieu.
Most likely, storage tanks in some areas reached capacity limits during August and September. Exports from the Gulf Coast slipped to about 96,000 b/d in third-quarter 2011, according to EIA statistics for July and our estimates for August and September.
Propane supply
Based on EIA data, total domestic production from gas plants and net propane production from refineries averaged 888,000 b/d for second-quarter 2011, and we estimate total domestic production was 880,000-885,000 b/d in third-quarter 2011.
In view of consistent understatement of propane production from refineries throughout 2010, we cannot accurately determine the year-to-year increase in total domestic production. Production from gas processing plants, however, was 4.8 million bbl more in second-quarter 2011 and 3.7 million bbl more in third-quarter 2011 than in 2010.
Since refinery crude runs were about 100,000 b/d lower in second-quarter 2011 and equal to year-earlier volumes in third-quarter 2011, we can reasonably conclude there was little change in the actual volume of refinery propane production from 2010. Finally, the year-to-year increase in domestic propane production offset all but 1 million bbl of the year-to-year increase in exports and feedstock demand.
Despite the nearly equal volumes of increased production and demand, propane markets in North America face tight availability for winter 2011-12, based on the significant decline in inventory levels on Oct. 1, 2011 vs. 2010.
Gas plants
EIA statistics indicate that gas plant propane production averaged 614,000 b/d for second-quarter 2011. Production in second quarter is typically higher than in first quarter and second-quarter 2011 was no exception. Production increased by 35,600 b/d from first quarter to second quarter.
Gas plant production in second-quarter 2011 was also 52,600 b/d more than year-earlier volumes. Gas plant production was slightly lower in third-quarter 2011 and averaged 605,000-610,000 b/d. Production was about 41,000 b/d higher than in 2010.
US gas plant production for second and third quarters 2011 was also 105,000-110,000 b/d (19.7 million bbl) more than the average for 2006-08 and development of NGL-rich gas in Texas ensures continued growth in supply. The historic transition from gas plant production at its steady levels of 2001-08 to the current growth trend began in 2009.
We forecast gas plant production will average 590,000-610,000 b/d during fourth-quarter 2011 and first-quarter 2012. Before 2010, US gas plant production was consistently lower than its historic peak in 2001 and historians will point to 2009-10 as the turning point to a sustained uptrend in domestic production.
Fig. 2 shows trends in propane production from gas plants.
Refineries
For second-quarter 2011, EIA statistics showed propane production from refineries (net of propylene for propylene chemicals markets) averaged 274,000 b/d and was 13,000 b/d higher than net refinery supply in first-quarter 2011. For third-quarter 2011 (based on EIA statistics for July and estimates for August and September), refinery-propane production was again 270,000-275,000 b/d.
We forecast purity propane supply from refineries will average 275,000-280,000 b/d for fourth-quarter 2011 and 255,000-265,000 b/d for first-quarter 2012. Fig. 3 shows trends in total propane production (gas plants and refineries).
Consistent with the seasonal decline in retail propane sales, propane imports from Canada typically average 65,000-75,000 b/d during second and third quarters. Additionally, East Coast terminals usually continue to receive shipments from international sources during second and third quarter but at reduced volumes, compared with imports during winter. |
Imports
Based on data for second-quarter 2011 published by the Foreign Trade Division of the US Census Bureau, total imports averaged 82,200 b/d and imports from Canada averaged 62,500 b/d. Total imports were equal to year-earlier volumes.
Imports from Canada during second-quarter 2011 were 6,600 b/d lower than year-earlier volumes. East Coast import terminals also received 19,700 b/d of waterborne imports during second-quarter 2011, or 6,500 b/d more than year-earlier volumes.
In third-quarter 2011, we estimate total imports averaged 70,000-80,000 b/d. Canada accounted for 60,000-65,000 b/d and various international sources provided 10,000-15,000 b/d of waterborne imports through East Coast import terminals. Imports from Canada were about 5,000 b/d lower in third-quarter 2011 than in 2010, but waterborne imports into East Coast terminals were 10,000-15,000 b/d higher than in 2010.
We forecast Canadian shipments to the US will average 120,000-130,000 b/d in fourth-quarter 2011 and first-quarter 2012. We note 2009-10 also marked a turning point in Canadian supply for the winter heating season. Before winter 2009-10, US markets could count on Canadian shipments of 135,000-175,000 b/d. The beginning of sustained growth in US natural gas production had the counterbalancing impact of reduced Canadian gas exports and, consequently, reduced gas-plant propane production, especially in Alberta.
Finally, we forecast waterborne imports (limited to East Coast terminals only) will average 30,000-40,000 b/d for fourth-quarter 2011 and 35,000-45,000 b/d for first-quarter 2012. Total imports will average 155,000-165,000 b/d for fourth-quarter 2011 and 165,000-175,000 b/d for first-quarter 2012. Total imports for winter 2011-12 will be about the same as the previous winter heating season.
Inventory trends
Propane inventory (excluding propylene inventory included in EIA gross propane/propylene inventory data) in primary storage in the US was 22.5 million bbl on April 1. EIA statistics from the Petroleum Supply Monthly (PSM) showed inventory increased 22.6 million bbl during April through July 2011 and increased 8-10 million bbl during August and September 2011. The seasonal build in US for 2011 was 31.4 million bbl. During 2008-2010, the seasonal inventory build was 33.5 35.0 million bbl.
At the beginning of winter 2011/2012, inventory in the US totaled 53.5 54.0 million bbl. During second-quarter 2011, inventory was 5-7 million bbl below year earlier volumes. At this year's seasonal peak, the inventory deficit compared with 2010 had narrowed to 3.7 million bbl due to the slump in propane exports in September and October.
Propane inventory in Canada typically begins to increase in March, but inventory in 2011 continued to decline in March and the seasonal recovery began in April. During April through August, statistics from Canada's National Energy Board showed inventory in Canadian storage increased 8.2 million bbl and totaled 11.5 million bbl on Sept. 1.
Historically, inventory in Canadian storage often begins its seasonal decline during September. In 2010, however, inventory reached its seasonal peak on Oct. 1. For 2011, due to the late summer slump in propane exports, inventory in Canadian storage continued to increase in September and reached a peak of 12.0-12.5 million bbl.
NEB also reports the breakout of purity propane inventory compared with propane contained in unfractionated mix. NEB statistics showed purity propane inventory in Canada totaled 9.0 million bbl on Sept. 1. At this volume, purity propane inventory was 600,000 bbl lower than in 2010. We estimate purity propane inventory reached a peak of 10 million bbl on Oct. 1, 2011.
For North America, inventories totaled only 26.6 million bbl on Apr. 1, 2011, and were 4.6 million bbl less than in 2010. By Sept. 1, 2011, inventories on a North America basis had increased to 64.5 million bbl and were 6.3 million bbl less than in 2010.
Markets in North America have the twin levers of reducing ethylene feedstock demand or exports or both to avoid the risk that imports will fall below historic minimum levels before Mar. 1. If inventory falls below the historic low of 24.2 million bbl, historians will have another reason to note the importance of this winter heating season.
Fig. 4 shows trends in propane inventory in US storage.
PADD: US Petroleum Administration for Defense Districts*PAD District 1 (East Coast) consists of three subdistricts: • Subdistrict 1A (New England): Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, Vermont. • Subdistrict 1B (central Atlantic): Delaware, District of Columbia, Maryland, New Jersey, New York, Pennsylvania. • Subdistrict 1C (lower Atlantic): Florida, Georgia, North Carolina, South Carolina, Virginia, West Virginia. PAD District 2 (Midwest): Illinois, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Missouri, Nebraska, North Dakota, South Dakota, Ohio, Oklahoma, Tennessee, Wisconsin. PAD District 3 (Gulf Coast): Alabama, Arkansas, Louisiana, Mississippi, New Mexico, Texas. PAD District 4 (Rocky Mountain): Colorado, Idaho, Montana, Utah, Wyoming. PAD District 5 (West Coast): Alaska, Arizona, California, Hawaii, Nevada, Oregon, Washington.. *PADDs were delineated during World War II to facilitate oil allocation. Source: US Energy Information Administration, Washington |
Regional inventory
EIA statistics (Table 2) showed inventory in primary storage in Petroleum Administration for Defense District (PADD) 2 (see box) fell to a low of 9 million bbl on Apr. 1, 2011. At this volume, inventory was 1.1 million bbl lower than in 2010. EIA monthly statistics show inventory increased by 15-16 million bbl during 2007-10 and increased 18.5 million bbl during 2009.
Based on EIA's final monthly statistics and weekly estimates, inventory increased by 16.5 million bbl and peaked at 25.5 million bbl on Oct. 1, 2011. Inventory increased at below-average rates during second-quarter 2011 and was 3-4 million bbl below 2010 levels. Inventory build rates during August, however, were more than double the historic average according to EIA weekly estimates and the build in August eliminated the deficit compare with 2010.
Inventory in primary storage in PADD 3 (excluding nonfuel propylene) fell to a low of 11.1 million bbl on Apr. 1, 2011. EIA's final monthly statistics showed inventory builds during April through July totaled 7.5 million bbl. Build rates were below average during this period.
The weakness in build rates was not surprising since waterborne exports were consistently 100,000 b/d or more during this period. EIA's weekly inventory estimates showed inventory increased by about 2.3 million bbl during August and September and total 21.0 21.5 million bbl on Oct. 1.
During April through July, the inventory deficit in PADD III widened to 5 million bbl. The inventory deficit widened to 8-9 million bbl on Oct. 1.
Pricing, economics
During second and third quarters 2011, price differentials between WTI and all other global price benchmarks widened to $20/bbl or more. Since WTI prices were no longer representative as the price basis for refined products and feedstocks after February 2011, we adjusted economic analysis models and we now use OPEC basket prices as the basis for evaluation of refined products and feedstocks. For more on our analysis of the divergence of WTI prices, please read two articles at www.petral.com/pcc_blog.
According to EIA statistics, crude oil production from Libya averaged 167,000 b/d during second-quarter 2011 and was 90% less than in January 2011. EIA statistics also showed key Organization of Petroleum Exporting Countries members did not increase production to make up for Libyan supply losses until June. Surprisingly, OPEC basket prices increased to a peak of $118.09/bbl in April but declined in May and June and averaged $109.04 /bbl in June. Prices in second-quarter 2011 were $35.62/bbl (46%) higher than in second-quarter 2010.
Yemen also experienced civil unrest during second-quarter 2011 and crude oil production declined to 75,000 b/d in June, or 175,000 b/d less than in January and February. Unrest in Yemen got much less media attention than events in Libya during second and third quarter but crude oil traders seemed to shrug off the loss of production from both countries during third-quarter 2011. OPEC basket prices were $106-112 /bbl during third-quarter 2011 and averaged $108.73 /bbl, or almost $4.00 /bbl less than in second-quarter 2011.
In April 2011, propane prices in Mont Belvieu averaged 145.1¢/gal and were 10.6¢/gal higher than in January 2011. Spot prices increased to 151-152¢/gal in May and June and averaged 149.5¢/gal for second-quarter 2011. Prices in second-quarter 2011 were 9.2¢/gal (6.5%) higher than in first-quarter 2011. In comparison, OPEC basket prices were 11.1% higher in second-quarter 2011 than in first-quarter 2011.
The price ratio of propane compared with OPEC basket averaged 56.1% in second-quarter 2011 compared with 58.6% in first-quarter 2011. Based on this approach, spot prices in Mont Belvieu were relatively weaker in second-quarter 2011.
A comparison of feedstock parity values provides a better indication of relative strength or weakness for the all important ethylene feedstock buyers. For second-quarter 2011, ethylene producers had an average incentive of 11.4¢/gal to use more propane rather than ethane or natural gasoline. The incentive to use more propane in first-quarter 2011 was only 2.4¢/gal. By this measure, propane prices were definitely weaker.
For third-quarter 2011, propane prices averaged 153.7¢/gal, and price ratios compared with OPEC basket crude prices increased to 59.4%. The increase in price ratios suggests propane prices were relatively stronger. Feedstock parity values changed more dramatically during third-quarter 2011 and underscored propane's relative price strength.
Throughout the third-quarter, propane maintained its incentive compared with natural gasoline, but the key shift in price-value relationships in the US Gulf Coast ethylene feedstock was propane's relative price strength compared with ethane. Ethylene producers saw disincentives of 3-4¢/gal in July and 10-15¢/gal in August and September. The market clearly began to respond to the supply-demand signals that propane availability would be tight for winter 2011-12.
Propane prices: winter 2011-12
Financial traders accounted for 60-70% of total open interest in the New York Mercantile Exchange (NYMEX) crude oil futures contract during second and third quarters 2011, according to the Commodities Futures Trading Commission. Based on CFTC statistics, large traders (excluding commercial accounts engaged in hedging physical positions in crude oil) boosted net long positions (holding of long contracts minus short contracts) to 250,000-270,000 contracts during March and April.
Despite the further declines in crude oil production during second-quarter 2011, large traders began to reduce net long positions during May and net long holdings were 150,000 contracts in late June. Net long positions for this group had not been this low since late November 2010.
We highlight this trend to illustrate the shift in concern among this group of traders from a strong "supply risk" orientation in March-April to their growing concern about weakening demand for refined products. Various factors indicate that economic growth in the US is likely to be weaker during the winter heating season 2011-12 than in the previous year.
Total crude oil production is likely to increase during this coming 6 months as production in Libya recovers and Arab members of OPEC slowly reduce production to offset. The outlook for increasing production and traders' concerns about sluggish economic growth support a forecast for further weakening in crude oil prices. We base our forecasts for propane on OPEC basket prices of $95-105 /bbl during winter heating season 2011-12.
The market has an imperative to offset the likely pull on supply as exports continue to flow into the international market at 100,000 b/d or more during winter 2011-12. During fourth-quarter 2011, we forecast spot propane prices in Mont Belvieu will average 155-165¢/gal. In this range, ethylene producers will have incentives of 20-25¢/gal to use less propane and more ethane. They will also, however, have incentives of 10-15¢/gal to use more propane and less natural gasoline and light naphtha.
If ethylene feedstock demand does not decline in response to this level of disincentive during fourth-quarter 2011, propane prices in Mont Belvieu will increase to higher levels.
We expect these feedstock economic relationships will result in reduced feedstock demand especially during fourth-quarter 2011, and a large reduction in feedstock demand will be necessary to offset tight availability. International LPG traders, however, will have price incentives of 10-30¢/gal to load cargoes for export from the Gulf Coast during fourth-quarter 2011.
Prices in Mont Belvieu will increase to a peak of 165-175¢/gal during first-quarter 2012, but discounts compared with spot prices in the Middle East and Mediterranean will be only 3-5¢/gal. Unless prices in Mont Belvieu rise to premiums, when compared with primary international supply sources, waterborne exports will continue to flow and propane availability will remain tight.
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