US PROPANE: MIDYEAR 2010: Mont Belvieu prices remain soft; ethane bites into feedstock demand

Nov. 1, 2010
During spring and summer 2010, three trends dominated propane markets in North America.

Dan Lippe
Petral Worldwide Inc.

During spring and summer 2010, three trends dominated propane markets in North America.

First, prices in Mont Belvieu remained well below parity compared with benchmark prices posted by primary international suppliers and a sustained flow of waterborne exports moved from export terminals in the Houston Ship Channel to various international destinations. At the same time, for the second year, Gulf Coast terminals received zero waterborne imports.

Second, ethane maintained a very high share of fresh feed in the Gulf Coast ethylene feedstock market and feedstock demand for propane was consistently weaker than historic averages. If feedstock demand had increased to typical seasonal levels (based on historic averages for percent of fresh feed), net availability for inventory accumulation would have been about 40,000 b/d (7 million bbl) less.

Alternatively, propane prices in Mont Belvieu would have been 10-30¢/gal higher to discourage waterborne exports. The increase in gas plant production and the sustained weakness in feedstock demand helped offset the flow of exports into international markets.

Feedstock demand for propane is an important balancing element for the overall propane market in North America. When warmer weather pushes sales and consumption in the retail markets steadily lower during second and third quarters, ethylene producers in the Gulf Coast have substantial capability to increase their consumption. The seasonal increase in feedstock demand partially offsets the seasonal decline in retail sales. Historically, feedstock propane demand reaches its seasonal peak during second and third quarters.

Finally, gas plant production was consistently higher than year-earlier volumes. Some refining companies in the Gulf Coast, however, clearly continued to misreport the composition of propane-propylene streams sold into the merchant market, and net propane supply from refineries was again understated during second-quarter 2010.

Feedstock demand

During second-quarter 2010, feedstock demand for propane declined by 7,000 b/d compared with consumption during first-quarter 2010 and averaged 271,000 b/d. Demand during second-quarter 2010 was also 9,000 b/d lower than in second-quarter 2009.

Historically, feedstock demand typically increases by 30,000-50,000 b/d from first quarter to second quarter. The seasonal weakness in feedstock demand for propane during second-quarter 2010 helped to offset unusually high waterborne exports from Gulf Coast export terminals.

Propane's share of fresh feed (total industry basis) averaged 17.4% during second-quarter 2010 essentially constant vs. 17.6% average for first-quarter 2010 and well below the 18.7% average for second-quarter 2009. During 2000-07, propane's share of fresh feed averaged 20.4% for the second-quarter and 18.6% for the third-quarter. Growth in ethane supply and feedstock demand for ethane contributed to weaker demand for propane.

Table 1 summarizes trends in ethylene feedstock demand for propane. Consistent with the weak economic recovery, ethylene producers operated at 86% of capacity during first and second quarters 2010 compared with 84% during fourth-quarter 2009. Ethylene industry demand for fresh feed averaged 1.55 million b/d for second-quarter 2010 compared with 1.58 million b/d during first-quarter 2010.

We note that ethylene inventory totaled 600 million lb on July 1. At this level, inventory was the equivalent of only 4 days' production. Production rates during June, July, and August rebounded to 1.57 million b/d.

For fourth-quarter 2010 and first-quarter 2011, total demand for fresh feed will average 1.55-1.60 million b/d. Feedstock demand for propane will average 240,000-260,000 b/d. Fig. 1 shows historical trends in ethylene feedstock demand for propane.

Retail demand

We estimate that total retail propane sales averaged to 1.07 million b/d for first-quarter 2010 and 314,000 b/d for second-quarter 2010. Retail propane sales will average 815,000-845,000 b/d for fourth-quarter 2010 and 1.04-1.07 million b/d for first-quarter 2011.


Pricing differentials between Mont Belvieu spot prices and posted prices for the important international benchmarks continued to provide economic incentives for international consumers and trading companies to purchase significant volumes of propane from the US.

During second-quarter 2010, propane exports from the Gulf Coast averaged 91,000 b/d (8.7 million bbl) vs. 97,000 b/d (8.8 million bbl) during first-quarter 2010, according to US Energy Information Administration statistics. Propane exports during third-quarter 2010 remained heavy and averaged 80,000-90,000 b/d.

The year-to-year increase in propane exports totaled about 4.5-5.0 million bbl for first, second, and third quarters 2010. The heavy volume of waterborne exports was a significant factor in limiting the seasonal increase in propane inventory.

Propane supply

Propane prices provided strong economic support for full-recovery operations by the gas processing industry during second and third quarters 2010. Similarly, refineries had strong economic incentives for merchant propane-propylene sales during second and third quarters 2010.

Propane's use as a space-heating fuel in residential-commercial markets declines sharply after first quarter and falls to its seasonal minimum during third quarter. Demand in third quarter is typically 700,000-800,000 b/d lower than in first quarter. Retail propane sales begin to increase during September-October and usually reach their peak during December-January.

Based on data published by EIA, total domestic production from gas plants and net propane production from refineries averaged an estimated 846,000 b/d, and we estimate total supply, as reported by EIA, averaged 845,000-855,000 b/d for third-quarter 2010.

Domestic production will average 805,000-815,000 b/d during fourth-quarter 2010 and 800,000-810,000 b/d for first-quarter 2011. These forecasts are subject to revisions as we fully digest the impact of reporting changes by some refining companies of their volumes of propane-propylene mix.

For winter 2010-11 (October 2010 through March 2011), domestic propane production will total 147 million bbl. When we include the expected withdrawal of inventory, total supply from domestic sources for the winter heating season will be 187-192 million bbl.

Gas plants

EIA statistics indicate that gas plants' propane production averaged 561,000 b/d for second-quarter 2010: 23,000 b/d more than year-earlier volumes and 9,000 b/d higher than first-quarter 2010. Gas plants' propane production in the Rocky Mountains for second-quarter 2010 was 12,000 b/d higher than year-earlier production and accounted for 50% of the overall increase.

Although the impact on total US propane supply was minimal, production from gas plants in Petroleum Administration for Defense District (PADD) 1 (East Coast) averaged 15,000 b/d in June and July, compared with an average of 11,000 b/d for first-quarter 2010. The increase in production in June and July may mark the first increase in production attributable to new gas production from the Marcellus shale play.

Beginning in January 2010, some refining companies with plants in the Texas Gulf Coast, South Louisiana, and upper Midwest changed how they reported the components for mixed composition propane-propylene streams to the US EIA. These changes had affected the reported volume of propane supply from refineries. EIA personnel have said these companies now report their propane-propylene streams as 100% propylene. To date, discussions have revealed that these refining companies had previously reported propane-propylene streams as 100% propane, and EIA break-out statistics had been overstating net propane production from refineries for as long as 10 years. This topic is now the subject of extensive discussion by the NGL Market Information Committee of the Gas Processors Association and between the committee and the EIA. Furthermore, this problem highlights the inherent uncertainty of EIA statistics regarding refinery-propane supply. As long as these companies continue to overstate propylene content of propane-propylene streams, EIA statistics will understate refinery merchant sales of purity propane and total propane supply.

We expect gas plants' production to average 545,000-555,000 b/d in third-quarter 2010 and 535,000-545,000 b/d in fourth-quarter 2010. Fig. 2 shows trends in propane production from gas plants.


In second-quarter 2010, EIA statistics showed total propane-propylene supply from refineries averaged 574,000 b/d. Gross propane-propylene production was 19,000 b/d higher than production in first-quarter 2010 and was also 19,000 b/d higher than production in second-quarter 2009.

According to EIA statistics, the propane content of gross propane-propylene production from US refineries averaged 292,000 b/d for second-quarter 2010 and was 24,000 b/d higher than the reported propane content for first-quarter 2010. The net propane content for second-quarter 2010, however, was 50,000 b/d less than EIA reported for second-quarter 2009.

For first and second quarters 2010, net propane refineries was 43,000 b/d (or 13%) lower than EIA statistics reported for first and second quarters 2009. The reported decline was the equivalent of 7.9 million bbl of propane supply. Since EIA statistics for net propane from refineries for 2009 were reportedly overstated and net propane from refineries for 2010 year-to-date was understated, the actual decline in supply was somewhat less than year-to-year differences indicate.

We estimate that propane supply from refineries averaged 290,000-310,000 b/d for third-quarter 2010. Net refinery-propane supply will average 270,000-280,000 b/d for fourth-quarter 2010 and 255,000-265,000 b/d for first-quarter 2011. Fig. 3 shows trends in total propane production (gas plants and refineries).


Data published by the US Census Bureau's Foreign Trade Division shows propane imports averaged 82,000 b/d during second-quarter 2010, or 99,000 b/d fewer than during first-quarter 2010. Propane imports from Canada averaged 69,000 b/d, or 57,000 b/d fewer than during first-quarter 2010. Finally, total propane imports for second-quarter 2010 were 12,000 b/d fewer than in second-quarter 2009.

In third-quarter 2010, total propane imports were an estimated 105,000-115,000 b/d, or 22,000-32,000 b/d more than in second-quarter 2010 and 25,000-35,000 b/d more than in third-quarter 2010.

Inventory trends

EIA statistics showed US inventory totaled 28.1 million bbl on Apr. 1, 2010. Apr. 1 typically marks the beginning of inventory accumulation season for the US. Inventory always increases during April through September. In some years, inventory continues to increase during October and even through mid November.

EIA statistics (final statistics as published in the Petroleum Supply Monthly) showed 50.5 million bbl in US storage on July 1, 2010. The increase in inventory during second-quarter 2010 totaled 22.4 million bbl. EIA weekly inventory statistics showed an additional increase of 13.2 million bbl during July, August, and September. Based on EIA weekly reports, propane inventory in the US reached an estimated peak of 63.5-64.0 million bbl during early September. At this level, inventory was 11.3-11.8 million bbl lower than in 2009.

When we exclude propylene contained in EIA inventory statistics, purity propane in US storage reached a peak of 61.5 million bbl in early September, or 9.3 million bbl less than the 2009 peak. Furthermore, inventory in 2009 did not reach its seasonal peak until early October. Based on expected seasonal demand, propane inventory in the US will fall to a low of 24-26 million bbl in late March 2011.

Consistent with the seasonal increase in retail propane sales, propane imports from Canada typically increase to peak seasonal volumes of 150,000-175,000 b/d during fourth quarter and 170,000-190,000 b/d during first quarter. In additional, propane imports from outside North America usually decline sharply during fourth quarter. Those imports typically remain at seasonally minimum levels during first quarter.

Canada's National Energy Board's statistics showed 3.1 million bbl remained in underground storage in Canada on Mar. 1, the point in the year that typically marks the beginning of the inventory accumulation season in Canada. Inventory in Canada typically reaches its seasonal peak on Oct. 1. Propane inventory in Canada never reached its peak later than Oct. 1 during 2000-09.

Based on NEB monthly reports, Canadian propane inventory increased to 12 million bbl on Sept. 1. Canadian propane inventory reached an estimated peak of 12.5-13.0 million bbl on Oct. 1 and was about 1 million bbl more than in 2009. Propane stocks in Canada are forecast to fall to a low of 2-3 million bbl in late February 2011.

Fig. 4 illustrates trends in propane inventory in US storage; Table 2 summarizes them.

Regional inventory trends

EIA statistics showed propane inventory in primary storage in PADD 2 totaled 10.1 million bbl on Apr. 1, lower by 3.3 million bbl than in 2009. By July 1, inventory in PADD 2 totaled 20.0 million bbl, according to EIA statistics. At this level, inventory was 4.2 million bbl lower than in 2009. EIA weekly reports showed inventory increased to 26.5 million bbl on Oct. 1. The seasonal peak for 2010 was 5 million bbl lower than in 2009 but compared favorably with the 5-year average.

EIA statistics showed propane inventory in PADD 3 totaled 13.9 million bbl on Mar. 1 and increased to 25.3 million bbl on July 1. EIA weekly reports showed inventory in PADD 3 reached its peak in early September 2010 and totaled 29.1 million bbl, or 5.0 million bbl lower than in 2009.

Pricing, economics

During second-quarter 2010, WTI prices averaged $77.78/bbl and were $0.89/bbl lower than the average for first-quarter 2010. Price trends were strongly bullish during March and April, but the financial crisis in Greece and the debate within the European Union regarding terms of the bailout brought the bullish trend to an abrupt end in May.

PADD: US Petroleum Administration for Defense Districts*PADD 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.

PADD 2 (Midwest): Illinois, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Missouri, Nebraska, North Dakota, South Dakota, Ohio, Oklahoma, Tennessee, Wisconsin.PADD 3 (Gulf Coast): Alabama, Arkansas, Louisiana, Mississippi, New Mexico, Texas.PADD 4 (Rocky Mountain): Colorado, Idaho, Montana, Utah, Wyoming.PADD 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, DC

WTI prices fluctuated within a relatively narrow range of $72-78/bbl during June through September. During this period of 22 weeks, the weekly average exceeded $80/bbl only once and similarly fell below $70/bbl only once.

In April 2010 (the beginning of the inventory build season), spot prices for propane in Mont Belvieu averaged 113.6¢/gal and were essentially unchanged compared with March 2010. Consistent with the bearish shift in crude oil prices, propane prices declined in May and averaged 107.6¢/gal. Spot prices declined again in June and averaged 103.8¢/gal. For second-quarter 2010, propane prices averaged 108.3¢/gal.

Prices weakened again in July and dipped to a year-to-date low of 100.9¢/gal. After July, however, prices began to rally and increased by 5.8¢/gal in August and by 5.5¢/gal in September. For third-quarter 2010, propane prices averaged 106.5¢/gal.

For second-quarter 2010, the ratio of spot propane prices compared with WTI averaged 58.6% vs. 66.6% for first-quarter 2010. Price ratios for third-quarter 2010 averaged 59%. During third-quarter 2010, however, price ratios rallied to about 63% in September from a weak 55.5% in July.

Economic price/value relationships in the Gulf Coast ethylene feedstock market are always the paramount consideration for true strength or weakness in Mont Belvieu prices. During second-quarter 2010, spot prices in Mont Belvieu were 17.6¢/gal below feedstock parity values compared with natural gasoline but were 4.1¢/gal higher than parity values compared with purity ethane. Price trends and feedstock parity values for second-quarter 2010 confirmed the price weakness implied by the ratio compared with WTI prices.

For third-quarter 2010, spot prices remained deeply discounted compared with natural gasoline, but the discount averaged about 13¢/gal. Propane prices were 9¢/gal higher than parity values compared with purity ethane. From the perspective of ethylene producers, propane prices were measurably stronger during third-quarter 2010.

Propane prices: winter 2010-11

Fundamental considerations (US inventories, US crude oil production, and US refinery crude runs) will turn bearish for crude oil prices during fourth-quarter 2010 and first-quarter 2011. Economic considerations (unleaded regular/WTI price differentials and overall refinery profit margins) will also become bearish for crude oil prices during fourth-quarter 2010.

To some extent, crude oil traders began to incorporate these bearish considerations into current spot prices and the forward curve for WTI. For example, WTI prices slipped to discounts of $3.00-5.00/bbl compared with dated Brent after mid-September. By late September, WTI prices had slipped to discounts of $2.00/bbl compared with spot prices for Dubai/Oman.

For financially oriented traders who trade crude oil based on variations in the Euro vs. the US dollar, WTI prices should have been stronger during third-quarter 2010. Perhaps the easing of tensions in the Middle East offset the bullish impact of factors that are the primary focus of financially oriented traders.

During fourth-quarter 2010 and first-quarter 2011, WTI prices will succumb to the combined influences of bearish fundamentals and further reductions in tensions between the US and Iran. WTI prices will likely fluctuate within a range of $70-77/bbl during the winter heating season and average $73/bbl for fourth-quarter 2010 and $72/bbl for first-quarter 2011.

During fourth-quarter 2010 and first-quarter 2011, spot propane prices in Mont Belvieu will continue to recover from the weakness of second-quarter 2010 and average 112-118¢/gal compared with third-quarter 2010 average of 106.5¢/gal. Prices are likely to be at their strongest levels during October-November and January—months when buying activity by propane retailers reaches its peak.

During fourth-quarter 2010 and first-quarter 2011, propane will yield an average demand disincentive of 15-20¢/gal compared with purity ethane. Propane, however, will provide ethylene producers with an average demand incentive of 5-15¢/gal compared with light naphtha.

On balance, price forecasts are consistent with the view that propane markets will require feedstock demand to decline to counterbalance the increase in retail propane sales during the winter heating season and the continued heavy flow of waterborne exports. From this perspective, propane prices will, on balance, average 3-5¢/gal above composite feedstock parity values.

Finally, our price forecasts indicate the propane/WTI ratio will average 62-67% during fourth-quarter 2010 vs. 56-62% during second and third quarters 2010. For first-quarter 2011, the propane/WTI ratio will average 62-70%.

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 and serves on the NGL Market Information Committee.

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