A slump in waterborne propane imports into the US during second and third quarters 2007 caused an inventory deficit to widen. For the 2007-08 winter heating season, the deficit itself is the critical supply parameter that defines the supply outlook for US propane markets.
Propane supply for the US winter heating season depends on domestic production, imports, and inventory in primary storage.
Primary storage facilities are those that report their inventories to the Energy Information Administration (EIA) weekly and monthly. From the perspective of propane retailers, propane inventory statistics are the most widely reported of the three sources of supply and are viewed as the critical supply parameter.
At the end of March 2007, EIA’s Petroleum Supply Monthly statistics showed that propane inventories in primary storage fell to a seasonal low of 27 million bbl. EIA inventory data report the combined volumes of both purity propane and refinery-grade propylene.
Propylene volumes contained in the reported inventory figure for the end of March totaled 2.7 million bbl. When propylene inventory is excluded, the true volume of propane in primary storage totaled only 24.3 million bbl.
On a net-adjusted basis, total US propane inventory at the end of March 2007 was 2.8 million bbl lower than year-earlier volumes. During second and third quarters 2007, accumulation of inventory in primary storage in the US totaled only 34-36 million bbl, or about 8 million bbl less than the average for 2003-06.
Feedstock demand
During first-quarter 2007, feedstock demand for propane rebounded to 357,000 b/d from 318,000 b/d in fourth-quarter 2006. Feedstock demand for propane continued to increase during second-quarter 2007 and averaged 366,000 b/d. Feedstock demand in second-quarter 2007 was only 10,000 b/d lower than in 2006 and did little to alleviate the growing inventory deficit.
As the inventory deficit widened during third-quarter 2007, propane prices in Mont Belvieu strengthened relative to other feedstocks, and feedstock demand declined to 352,000 b/d in July and 336,000 b/d in August. Feedstock demand in September hit an estimated 300,000-320,000 b/d and demand for third-quarter 2007 averaged 329,000-336,000 b/d.
In comparison, feedstock demand in third-quarter 2006 averaged 349,000 b/d, or 13,000-20,000 b/d more than in 2007. Again, as during second-quarter 2007, the year-to-year decline in feedstock demand was insignificant in comparison with the growing inventory deficit.
Ethylene plants operated at 91% of nameplate capacity during second-quarter 2007 and 93% of capacity during second-quarter 2007. Ethylene plants are forecast to operate at 90-92% of nameplate capacity during fourth-quarter 2007 and 92-93% during first-quarter 2008.
Total feedstock demand will likely average 1.70-1.725 million b/d during fourth-quarter 2007 and 1.75-1.78 million b/d during first-quarter 2008. Propane consumption in the ethylene feedstock market, however, will decline sharply in fourth-quarter 2007 and average 265,000-275,000 b/d, or about 50,000 b/d less than in 2006.
In first-quarter 2008, feedstock demand will average 280,000-310,000 b/d, or 55,000-60,000 b/d less than year-earlier volumes. The year-to-year decline in feedstock demand during fourth-quarter 2007 and first-quarter 2008 will offset the inventory deficit of 10 million bbl but only over the course of the winter heating season 2007-08. Fig. 1 shows historic trends in ethylene feedstock demand.
Retail demand
Consistent with the seasonal in heating degree-days, retail demand fell to its seasonal low during second and third quarters 2007. April-May 2007, however, was about 20% cooler than April-May 2006 for the New England-Mid-Atlantic and upper Midwest regions.
Based on cooler weather during the transition to summer, we estimate that total retail propane sales averaged 425,000 b/d in second-quarter 2007, or about 60,000 b/d higher than in 2006. The year-to-year increase in retail sales equaled 5.5 million bbl and clearly affected the accumulation of inventory in primary storage during second-quarter 2007.
In third-quarter 2007, we estimate that retail propane sales averaged 200-210,000b/d vs. 195,000-205,000 b/d in third-quarter 2006. Retail sales were essentially equal to the average for 2001-06.
During a truly cold winter, retail propane sales will be significantly higher than during winter 2006-07. The record high for retail propane sales occurred during winter 2000-01 and totaled an estimated 210 million bbl. Propane supply-demand forecasts for winter 2007-08, however, are based on total retail sales of 180-190 million bbl. In comparison, retail sales totaled 171 million bbl during winters 2006-07 and 2005-06.
Retail propane markets in the US and Canada will face significant difficulties in meeting demand during a truly cold winter. Inventories in primary storage will almost certainly be fully depleted before the end of February 2008 in a winter with only an average number of heating degree-days.
Propane supply
Gas processors continued to experience very strong profit margins in all US producing regions during second and third quarters 2007. Furthermore, propane prices were consistently 40-60¢/gal higher than their btu-equivalent based on spot natural gas prices in the Houston Ship Channel market-indicating that refineries had no economic incentive to use propane instead of natural gas in their fuel systems.
Strong profitability for all gas processing plants and the economic incentives for refineries lead to the conclusion that US propane production was at full recovery levels for both gas plants and refineries. Data published by EIA show total production from gas plants and net propane production from refineries averaged 841,000 b/d, or 39,000 b/d higher than year-earlier volumes.
Gas plants
EIA statistics indicate that gas plants’ propane production averaged 503,000 b/d for second-quarter 2007 and was an estimated 505,000-515,000 b/d during third-quarter 2007. We expect gas plant production to average 490,000-500,000 b/d in fourth-quarter 2007 but to increase to 525,000-535,000 b/d in first-quarter 2008.
Fig. 2 presents trends in propane production from gas plants.
Refineries
In second-quarter 2007, propane production from refineries (net of propylene for propylene chemicals markets) averaged 338,000 b/d-an increase of 13,000 b/d from net refinery supply in first-quarter 2007 and 37,000 b/d higher than year-earlier volumes, according to EIA statistics.
We estimate that propane supply from refineries averaged 335,000-345,000 b/d in third-quarter 2007, and we expect net refinery production to average 320,000-330,000 b/d in fourth-quarter 2007. The projected decline in production in the fourth quarter is consistent with general seasonal trends and the seasonal decline in refinery operating rates.
Fig. 3 presents trends in total propane production (gas plants and refineries).
Imports
Based on data from the US Census Bureau’s Foreign Trade Division, propane imports from Canada declined in second-quarter 2007, consistent with normal seasonal patterns. Imports from Canada averaged only 75,000 b/d in second-quarter 2007, however, or 19,000 b/d less than year-earlier volumes and 25,000 b/d below the average for 2000-05. We estimate that propane imports from Canada increased to 90,000-100,000 b/d in third-quarter 2007 and were 5,000-15,000 b/d below the average for 2000-05.
We have to ask why propane imports from Canada were consistently below average during second and third quarters 2007.
First, inventories of purity propane in underground storage fell to less than 2 million bbl by Mar. 1, 2007, and remained less than 2 million bbl until after Apr. 1. At the beginning of the inventory accumulation season, propane in underground storage in Canada was 1 million bbl less than the 5-year average and 1.3 million bbl less than year-earlier levels.
This inventory deficit represents 10-15% of Canada’s peak inventory levels for 2001-05. Thus, Canadian producers tried to rebuild inventories by limiting exports to US markets during second and third quarters 2007. By Sept. 1, Canadian producers had increased inventories of purity propane to 9.4 million bbl, or about 900,000 bbl less than in 2006 and less than 600,000 bbl less than the 5-year average.
Consistent with seasonal supply trends, international imports increased in second-quarter 2007, but waterborne imports averaged only 78,000 b/d, as reported by the Foreign Trade Division. International imports were 32,000 b/d less than year-earlier volumes but slightly higher than the average for 2002-06.
We estimate that international propane imports averaged only 60,000-70,000 b/d during third-quarter 2007, or 88,000 b/d less than in 2006 and 45,000 b/d less than the average for 2002-06. The year-to-year decline in waterborne imports during second and third quarters totaled 11 million bbl.
Overall inventory trends
Mar. 31 normally marks the end of the inventory liquidation season for the US. Occasionally, propane inventories continue to decline during April if temperatures are below average.
According to EIA weekly statistics, propane inventories fell to a seasonal low at the end of March 2007 and began to increase during the first week of April. EIA monthly statistics indicate that total inventories (including propylene for nonfuel uses) totaled 27 million bbl on Apr. 1.
During 2003-06, the seasonal accumulation of propane in primary storage ranged consistently 40-45 million bbl. In 2002, however, the seasonal inventory build totaled only 31.7 million bbl. For 2007, based on EIA’s monthly statistics through July and weekly statistics for August and September, the seasonal inventory build totaled 32.5 million bbl and inventories totaled 59-60 million bbl on Oct. 1, 2007. Based on historic trends during October, inventories reached a peak of 61-62 million bbl in late October.
Including Canadian inventories in underground storage, propane markets will have access to 74 million bbl of supply in primary storage during the winter heating season. This volume was 12 million bbl less than in 2006.
At the end of the 2006-07 winter heating season, purity propane inventories in underground storage in Canada fell to a low of 1.9 million bbl on Mar. 1, 2007. At this level, purity propane inventories were 1.5 million bbl below the 5-year average and 2.5 million bbl lower than in 2006.
Based on statistics from Canada’s National Energy Board, Canadian companies added 7.5 million bbl of propane Mar. 1 through Sept. 1, 2007. The seasonal build in Canadian storage erased nearly all the inventory deficit on Mar. 1, 2007.
Fig. 4 illustrates trends in US propane inventory.
During 2002-06, total withdrawals of propane from primary storage totaled 39-49 million bbl. For the 2007-08 winter heating season, withdrawals of more than 40 million bbl will pull US inventories below their historic low of 21.6 million bbl (March 1993). When accounting for pipeline fills, brine availability, and other distribution system constraints, the industry views 20 million bbl to be the practical minimum.
In an average winter, retail propane demand will be 5-10 million bbl higher than is forecast for winter 2007-08. With inventories likely to reach a seasonal peak of no more than 62 million bbl, the market has the potential to pull inventories to new record lows by February 2008 and may test the ability of storage operators to withdraw product from salt cavern storage. Furthermore, markets will also require feedstock demand for propane to remain below average throughout the winter heating season.
Regional inventory trends
On Apr. 1, 2007, propane inventory in primary storage in US Petroleum Administration for Defense District (PADD) II fell to a low of 8.6 million bbl, or 2.6 million bbl less than year earlier levels but only 0.3 million bbl less than the average for 2001-05.
During second-quarter 2007, inventory in primary storage in PADD II increased by 8.0 million bbl and totaled 16.6 million bbl on July 1. At this level, inventories were 4.1 million bbl less than in 2006 but only 0.8 million bbl less than the 2001-05 average.
During third-quarter 2007, inventories increased by an additional 8 million bbl and totaled 24-25 million bbl on Oct. 1. The inventory build during third-quarter 2007 was above average and reduced the deficit vs. 2006 to about 1.8 million bbl. Furthermore, inventories on Oct. 1 were also about 0.5 million bbl higher than the average for 2001-05.
According to EIA monthly statistics, propane inventory in primary storage in PADD III totaled 14.4 million bbl on Apr. 1, 2007, and were 1.2 million bbl below year-earlier levels but were only 0.7 million bbl below the average for 2001-05. During second-quarter 2007, however, inventory in primary storage in PADD III increased by only 7.4 million bbl vs. or 5.5 million bbl, less than the 2001-05 average. The slump in waterborne imports during second-quarter 2007 was a primary reason for the abnormally low build.
Furthermore, waterborne imports during third-quarter 2007 remained lower than in 2006 and the inventory build in PADD III during third-quarter 2007 totaled only 5.5 million bbl, or 2.1 million bbl less than average, based on EIA’s weekly statistical report. As a result, on Oct. 1, inventory in PADD III totaled 27-28 million bbl and was 9.1 million bbl less than the year-earlier level and 7.8 million bbl less than the 2001-05 average. The inventory deficit of 9.1 million bbl in PADD III was primarily due to the year-to-year decline of 11 million bbl in waterborne imports.
Pricing, economics
During second-quarter 2007, propane prices in Mont Belvieu increased to an average of 113.9¢/gal in June from 110.9¢/gal in April. Despite the modest increase spot prices, propane’s ratio vs. West Texas Intermediate declined to 70.9% in June 2007 compared with 72.9% in April 2007. These comparisons indicate that spot prices in Mont Belvieu almost kept pace with the $3.61/bbl increase in spot WTI prices during second quarter.
With the onset of the hurricane season, WTI prices jumped sharply and averaged $74.10/bbl in July, or $6.65/bbl higher than the average in June. Propane prices increased in July but did not keep pace with the strong rally in WTI prices, and the ratio weakened to 67.5%. July marked the low point for the propane/WTI ratio.
Spot propane prices in Mont Belvieu averaged 121.7¢/gal in August and 128.4¢/gal in September. Propane’s ratio vs. WTI also increased to 68.9% in August but slipped slight in September and averaged 68.1%. Trading activity in Mont Belvieu during second and third quarters 2007 ignored the mounting evidence that propane supply for winter heating would be significantly lower than during 2004-06.
Parity values
During second-quarter 2007, spot prices in Mont Belvieu averaged 113.2¢/gal and propane’s feedstock parity value averaged only 112.8¢/gal. By this measure, propane prices were neutral relative to ethane and natural gasoline during second-quarter 2007. During third-quarter 2007, however, spot prices in Mont Belvieu averaged 122.3¢/gal but feedstock parity values averaged only 117.8¢/gal.
Based on this comparison, propane prices were relatively stronger during third-quarter 2007. The shift in price/value relationships during third-quarter 2007 was consistent with the emerging view of tight supplies for 2007-08 winter heating.
2007-08 winter prices
Many people in the petroleum products and petrochemicals industries expect crude oil prices to remain greater than $80/bbl or to increase further during the 2007-08 winter heating season.
During 2001-06, propane’s price ratio vs. WTI averaged 70-75% in fourth quarter. The tight supply situation and low inventory level in PADD III will support stronger propane prices relative to other ethylene feedstocks. Based on an expected propane/WTI price ratio of 75% and WTI prices at $80/bbl, spot prices in Mont Belvieu are likely to be 135-145¢/gal during fourth-quarter 2007.
In 2006, WTI prices in fourth quarter fell by $10/bbl vs. the average for third-quarter 2006. For fourth-quarter 2007 and first-quarter 2008, crude oil inventories will be adequate, gasoline prices are likely to fall to typical seasonal levels vs. WTI.
Hence, WTI prices may fall by $10-15/bbl during fourth-quarter 2007 and may average $65/bbl in fourth-quarter 2007 and $60-65/bbl in first-quarter 2008. On this basis, spot propane prices in Mont Belvieu will decline to 105-115¢/gal for fourth-quarter 2007 and first-quarter 2008.
The author
Daniel L. Lippe ([email protected]) is president of Petral-Worldwide Inc., Houston. He founded Petral Consulting Co. in 1988 and cofounded Petral Worldwide in 1993. He has expertise in economic analysis of a broad spectrum of petroleum products including crude oil and refined products, natural gas, natural gas liquids, other ethylene feedstocks, and primary petrochemicals. Lippe began his professional career in 1974 with Diamond Shamrock Chemical Co., moved into professional consulting in 1979, and has served petroleum, midstream, and petrochemical industry clients since that time. He holds a BS (1974) in chemical engineering from Texas A&M University and an MBA (1981) from Houston Baptist University. He is an active member of the Gas Processors Association, serving on the NGL Market Information Committee and currently serving as vice-chairman of the committee.
Propane feedstock demand has been one of the most important balancing elements of the overall propane market in North America. When colder weather has pushed sales and consumption in the retail markets steadily higher during November through February, ethylene producers in the Gulf Coast have used their substantial feedstock flexibility to reduce their consumption of propane.
This predictable shift in feedstock demand for propane has offset some or all of the impact of a colder than normal winter, loss of production, or low inventory levels. Historically, most of the seasonal decline in ethylene feedstock demand has occurred during the fourth quarter.
Propane’s use as a space-heating fuel in residential-commercial reaches its seasonal peak each year during the fourth and first quarters. Residential-commercial propane demand begins to increase during October and usually reaches peak demand during December-January.
Consistent with the seasonal increase in retail propane sales, propane imports from Canada typically decline to seasonally low volumes of 100,000-110,000 b/d during second and third quarters. Propane imports from other international sources (outside North America), however, usually increase to a seasonal peak of 100,000-150,000 b/d during third quarter.
In most market situations, trends in crude oil prices and ethylene feedstock-parity values are the dominant influences on propane prices. The spring and summer of 2007 were not exceptional until September 2007.
In view of the ethylene industry’s significant capability to adjust its consumption of propane within 1-2 months, propane prices vs. alternative ethylene feedstock values are a better measure of the relative strength or weakness in spot prices in Mont Belvieu.
