EIA: U.S. Propane Price Hikes Market-driven

U.S. Winter Propane Supply [19,629 bytes]

The U.S. Energy Information Administration reports that U.S. propane price increases during August-November 1996 were market-driven.

Those factors included price increases in crude oil, low stocks, and strong demand in the Midwest.

In a study of the propane market last winter, EIA noted, "Propane has become an increasingly significant element in U.S. and world energy markets in recent years. It has long proven its versatility as a fuel for space heating and other residential uses, for industrial and agricultural applications, and for internal combustion engines. The single largest demand sector for propane is as a feedstock for petrochemical manufacturing."

Price hikes

It said last fall was the fourth time in the past decade in which propane prices rose rapidly in a short time.

Spot prices at Mont Belvieu, Tex., and Conway, Kan., the major propane storage and distribution centers, rose from about 36¢/gal at the beginning of August to 50¢ by the end of September, the traditional beginning of the heating season. The preseason prices were the highest since 1990.

EIA said prices continued to rise during the season. Conway prices soared in November, peaking at 107.5¢/gal on Dec. 16. Mont Belvieu prices peaked at 70.3¢ on Dec. 3. Then both began falling, with Conway reaching parity with Mont Belvieu by mid-February and both returning to more seasonable levels by March.

Conclusions

EIA attributed the price increases partly due to the rise in crude prices. "Since crude oil is a major propane feedstock, propane prices generally follow significant crude price movements. Crude oil prices increased $5/bbl from late July to mid-October, with propane keeping pace."

It said propane prices also are sensitive to early-winter stock levels, because stocks are an important supply source during the peak heating season.

Stocks usually supply about 20% of propane demand in December, January, and February compared with distillate stocks, which supply about 12% of demand during those same months.

"Nationally, propane inventories at the end of September were at their third lowest level for the start of the winter heating season. Most of the shortfall was on the Gulf Coast and was the result of a slightly below-average summer stock build and a low starting level at the end of 1995-96. Cold weather and late crop-drying needs boosted demand in the Midwest in October, dashing any hopes of a late stock recovery."

EIA noted that U.S. propane supply is relatively inflexible, because the fuel is a byproduct of refining and gas processing, and imports can take weeks to arrange.

It said demand also is inflexible. It is determined by the weather and little fuel switching capability exists.

However, EIA said the petrochemical industry reduces propane use when prices rise too much: "From August through December 1996, petrochemical use of propane dropped by over 130,000 b/d in response to price increases."

EIA said Conway prices rose more rapidly than those at Mont Belvieu last winter due to colder than normal weather in the Midwest, following extraordinarily strong demand in October and November that depleted stocks.

Projections

EIA said propane markets are expected to be well supplied next winter.

It said world crude oil price levels, which underlie all petroleum product markets, are widely expected to be significantly lower this fall, down by more than $3.50/bbl from last year.

It said that assuming the return of both a normal heating season and an average corn crop, Midwest propane demand in the fall should be well below last fall's record levels, which were 23% above the 5-year average.

EIA said, "The significantly higher season-ending propane stock levels in March 1997, compared with the previous spring, should allow for higher beginning stocks this fall than in 1996." It said stocks ended the winter 4.4 million bbl higher than the previous year.

And it said high levels of refinery inputs, needed to meet gasoline demand, also will result in higher domestic propane production. It said as much as 6,000 b/d of additional propane could be produced.