US propane: prices hold, inventories remain low in first quarter 2004

June 7, 2004
At the end of first quarter 2004, monthly average propane prices in the US firmed to 58¢ and 60¢/gal at Conway, Kan., and Mont Belvieu, Tex., respectively. February stocks closed at 25.8 million bbl, still 5 million bbl below normal.

At the end of first quarter 2004, monthly average propane prices in the US firmed to 58¢ and 60¢/gal at Conway, Kan., and Mont Belvieu, Tex., respectively. February stocks closed at 25.8 million bbl, still 5 million bbl below normal.

Petrochemical demand stayed strong in March at 337,000 b/d. February extraction was also strong at 536,000 b/d. Refinery production of propane averaged 340,000 b/d in January.

Pricing

A propane price correction that was evident in February ended in March. While prices going into second quarter 2004 were only higher by 1¢ at 60¢/gal at Mont Belvieu, it appears we have entered an era of relatively stable but higher prices. Prices appeared likely to remain near 60¢/gal through mid third quarter 2004 before heading much higher as winter approaches.

Continued fears of natural gas shortages have kept gas prices high and more or less forced NGL and propane prices higher to justify extraction. A similar situation exists and will continue through summer at the refinery level where continued strong crude oil prices make propane more expensive to recover as a by-product.

This winter could easily bring prices into the 70-75¢/gal range based on continued strong crude oil and natural gas prices as well as ongoing strong petrochemical feedstock consumption. This alone could help deplete stocks before propane is priced out of the feedstock market.

OPEC countries will continue to "talk" supply down while producing above their own quotas, but the market as the second quarter began was absorbing current levels of production. The price was not too high in the first quarter or there would have been some evidence of conservation or demands for increased fuel efficiency.

In an ideal situation, free-market pricing would balance supply and demand at some level with which consumers felt comfortable. Demand destruction would occur if prices moved too high.

In April, a crude oil price level of $40/bbl seemed not too far off, particularly because of strong demand from China and India that will be a factor in absorbing any excess production.

While OPEC still has excess production capacity, at least two of its members in April were no longer capable of meeting their quotas because of poor reinvestment.

Without Russia's enthusiasm for increasing production, we might well witness a test of free-market pricing soon.

As the second quarter began, the propane-to-No. 2 fuel oil ratio had increased to 1.12:1 on a ¢/btu basis. The monthly average WTI ratio improved modestly to 69% (spot C3 cash prices vs. Nymex crude).

February propane supply

C3 extraction continued at strong levels of 536,000 b/d in February (Fig. 1), according to EIA, and, although data had yet to be released for March, should continue so through March, despite strong natural gas princes of nearly $5.60/MMbtu.

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This is undoubtedly one of the benefits of fee-based processing, since calculation of processing economics in the traditional sense would have had processor margins negative during February.

It now seems likely that extraction rates will run at a 5-year average of extraction rates or slightly higher for most of 2004 and that traditional margins will continue at breakeven or positive because of strong NGL prices.

Another factor in strong NGL prices will be record high motor-gasoline prices that were setting historical highs for nearly every week on the Nymex through first quarter 2004.

This will affect blend stocks or components such as natural gasoline and isobutane, which are used in the production of C8 gasoline alkylate.

Natural gas prices still appear ready to decline this summer, to $4.60-4.80/ MMbtu, but only because normal to cooler-than-normal summer weather is predicted.

The latest anticipated annual average price is $5.12/MMbtu. As of mid-April, the natural gas build of 28 bcf left working gas in storage at 1.077 tcf or 66 bcf below a 5-year average.

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Refinery production slipped again in February because of reduced operating rates to 340,000 b/d (Fig. 2), slightly less that the 5-year average of 345,000 b/d.

Imports through February, both waterborne and Canadian, totaled a strong 309,000 b/d.

Marine propane movements

Waterborne imports to the US in March increased to slightly more than 2.3 million bbl, according to the Mar. 25, 2004, issue of the Waterborne LPG Report from Commercial Services Co. Ltd. This was not surprising considering the end of winter demand and US stocks almost at normal levels. When this is coupled with negative spot price netbacks of $25/tonne from both the North Sea and Western Mediterranean, it reinforces the decline. From the April perspective, scheduled cargoes for May were up but still substantially below 1 million bbl and split 55:45 to the Gulf Coast and East Coast.

Spot cargoes remain minimal until the spreads improve.

Waterborne exports during April and May were likely to continue insignificant, or less than 10,000 b/d. Total exports were likely to average about 20-30,000 b/d.

Petrochemical demand

The US petrochemical industry had another strong month in March, even though ethylene operating rates declined to 85.4% from February's 87% rate. This was the fifth straight month that rates have hovered near 85% and propane consumption has continued above normal.

While propane cash costs, at slightly more than 22¢/lb of ethylene produced, are not the most competitive, it provides a product mix of ethylene and propylene which is highly desirable. C2/C3 mix and natural gasoline/light naphthas are still the best feedstocks, but the industry has been helped by the relative stability in feedstock costs.

If the US economy continues to grow, operating rates will likely ratchet up slowly, perhaps to 88-90%, by the end of summer.

The feedstock slate will change through the summer, with increasing amounts of butane consumed, then change again in the fall as butane is blended back into motor gasoline.

Propane demand in March averaged 337,000 b/d out of total consumption of 1.736 million b/d, according to the Hodson Report from Jacobs Consultancy. Growth in the economy prompts an annual forecast for propane of 320,000 b/d.

Inventories

February stocks of US propane closed below normal at slightly less than 25.8 million bbl (Fig. 3), but the build appears to have started in earnest as of the end of April. Extraction levels continued strong through first quarter 2004, helped by strong NGL prices and more fee-based processing contracts that have enhanced the viability of gas processors.

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There appear to be no problems on the supply side as far as the stock build is concerned particularly with refineries coming back from turnarounds. Strong petrochemical demand, however, will likely limit the size of the monthly builds as long as propane stays competitively priced.

These factors indicate a build to peak at 63 million bbl; slightly below the 5-year average of 64.1 million bbl.

Regional inventories

Stocks from Petroleum Administration for Defense District I stocks ended February slightly below normal at 2.81 million bbl. PADD I states are Maine, Vermont, New Hampshire, Massachusetts, Rhode Island, Connecticut, New York, Pennsylvania, New Jersey, Delaware, Maryland, West Virginia, Virginia, North Carolina, South Carolina, Georgia, and Florida.

Waterborne imports have traditionally helped the region remain near normal and 2004 should be no different. In fact, slightly more than 630,000 bbl were to have been imported in May and, as a consequence, the region will track near normal for the remainder of the year.

PADD II stocks declined to 10.2 million bbl at the end of February but had built back to slightly more than 11 million bbl by late April. Because of this solid build, stocks should track near normal through the summer then exceed an average of 24 million bbl with the approach of the winter demand season.

PADD II states are North Dakota, South Dakota, Nebraska, Kansas, Oklahoma, Minnesota, Wisconsin, Iowa, Michigan, Illinois, Missouri, Indiana, Ohio, Kentucky, and Tennessee.

Stocks will likely peak at slightly more than 25 million bbl. PADD III stocks declined to 12 million bbl at the end of February but recovered to nearly 14 million bbl by late April. While this is more than 3 million bbl below normal, strong NGL prices and fee-based processing will provide incentives for deep extraction.

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As a result, stocks will approach normal levels by late summer and track at normal levels the remainder of the year. Strong petrochemical demand will prevent an excessive build. Stocks should peak at 30-32 million bbl (Table 1).

PADD III states are New Mexico, Texas, Arkansas, Louisiana, Mississippi, and Alabama.

Canadian inventories

Canadian stocks recovered at the end of first quarter 2004 from the deep draws caused by the blasts of arctic air that hit the country this winter. Stocks moved to slightly more than normal at nearly 3.2 million bbl at the end of March, according to Canada's National Energy Board. At this point, nothing should stop the build from proceeding at average to above average pace the remainder of the year.

An above average pace would mean fewer exports to the US Midcontinent, but there is enough slack in supplies to permit moderately aggressive exports without affecting national stocks. The West-East split was effectively 50:50 as second quarter 2004 began.

The author

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Michael Horvath Jr. ([email protected]) is president of M. Horvath & Associates, Houston, and author of The Propane Market Strategy Letter. He served as director of business development at Tauber Oil Co. until retiring earlier this year. Horvath has more than 30 years of experience in the NGL, petrochemical, and consulting business. He holds a BS (1972) in chemistry and mathematics from the University of Houston and has taken post-graduate courses in business law and economics. Horvath is a member and past chairman of the Houston Chapter of the Gas Processors Association and the Gas Processors Suppliers Association.