January 29, 2001

Propane - A Mid-Heating Season Assessment
by David Hinton and Alice Lippert, Petroleum Division,
Office of Oil and Gas, Energy Information Administration

In early October 2000, the Energy Information Administration (EIA) forecast that heating fuel markets would be expected to start the season with much higher prices and lower inventories than in recent years. While this assessment was true for both the heating oil and natural gas markets, propane markets actually began the season with adequate supplies but with high prices. Since EIA’s forecast, propane inventories have plunged nearly 20 million barrels from their peak during the first half of the 2000-01 heating season while propane prices have continued to soar even higher than expected during this same period. This report will analyze some of the factors leading up to the rapid increase in propane demand and subsequent deterioration in supply that propelled propane prices to record high levels during December and early January.

Prior to the start of the 2000-01 heating season, the major concern among industry observers was heating oil supplies, down more than 20 percent from the prior year level and significantly below the normal range for that time of year. In contrast, propane inventories began the heating season about 3 percent above the prior year level with inventories within the normal range. Despite colder-than-normal temperatures from November through December, concern over heating oil supplies waned while at the same time increased for propane supplies and price (Figure 1).

Table showing colder than normal weather in Nov. and Dec. 2000

Cold Weather Spurs Higher Demand
Despite the nearly 5 percent year-over-year decline in demand for propane through November 2000, the sustained colder-than-normal weather over most of the Nation during December likely jumpstarted demand for the final month of the year. While exceptionally strong heating demand is anticipated, other propane sector demand increases are also expected to show gains during December 2000. For instance, high natural gas prices have encouraged the use of propane as an alternative fuel in industrial sector use. Moreover, processing facilities such as refineries, gas processing plants and fractionators are using propane as plant fuel instead of natural gas and other petroleum based fuels.

But the recent surge in demand has also caused several pipeline operators to issue warnings about reducing delivery rates. The operators report that as cavern inventories reach lower levels, trying to maintain high delivery rates also causes the recovery of brine. Brine is a saltwater solution that is injected into the cavern to displace propane when it is pumped to the surface. However, when cavern inventories reach very low levels, extraction of propane is slowed to reduce the amount of brine that is also extracted from the caverns. This could hamper pipeline deliveries of propane over the second half of the heating season.

Additionally, while propane demand rebounded during late 2000, petrochemical sector demand had been declining during the latter part of the year, as high propane prices became a disincentive for cracking propane as a feedstock. Petrochemical sector demand was trimmed by about 60 thousand barrels per day between the first six months of the year compared with the last five months of 2000. Despite this decline from the petrochemical sector, propane demand is still likely to show strong growth in December due to the unusually cold temperatures.

Propane Supply Deteriorated During December
Propane production remained strong during 2000, surpassing prior year levels, and contributed to the strong stock build during the spring and summer months (Figure 2). From the end of the heating season in March 2000, propane inventories were built up at a robust pace, and peaked at more than 63 million barrels by the end of October 2000. However, during this same period, propane prices at both the wholesale and retail levels remained high due to continued high crude oil and natural gas prices. While crude oil prices began to soften during December 2000, natural gas prices continued to soar, forcing many natural gas processors in South Louisiana and Texas to either shut down plants or significantly reduce their take of propane. Preliminary data show that propane production in the Gulf Coast (Petroleum Administration for Defense District III) fell by nearly one-third from the end of November 2000 through mid -January 2001. Propane producers in the Gulf Coast region accounted for nearly 65 percent of U.S. production of propane during 1999.

Monthly US Propane Production, 1995-1999 average, 1998, 1999, 2000

By late December 2000, the effects of lower production from South Louisiana began to reverberate through the distribution system, causing propane to sell for a premium in markets from Florida to the Carolinas. Production from South Louisiana gas fields feeds the Dixie Pipeline that is the major supplier of propane from Hattiesburg, Mississippi, to Apex, North Carolina. Propane supply hubs in other regions, such as Mont Belvieu, Texas and Conway, Kansas, were not impacted as much as the Southeast region market hub at Hattiesburg because gas plants supplying propane to these regions were not being shut down during this period. According to industry sources, gas plants operating in producing areas in the West are generally not permitted under their contracts to shut down production, unlike the newer gas plants in South Louisiana which generally are allowed to temporarily shut down production for economic reasons under their contracts.

By January 2001, a surge in propane imports, particularly from the Middle East, had begun to partially offset the effects of production cuts. High U.S. propane prices are providing an attractive market for surplus world propane. Preliminary weekly data published by EIA show propane imports up by more than 100 thousand barrels per day during the first three weeks of 2001 from the last week of December 2000.

U.S. and regional inventories remained within their respective normal ranges through November, but sustained colder-than-normal temperatures and declining production during December caused U.S. inventories to plunge during the month. The estimated December 2000 stock draw was the largest ever, measuring 18.7 million barrels. Moreover, by the end of December, U.S. and regional inventories in all the major propane consuming areas registered below their normal ranges. But the overall stock draw for the first half of the heating season (October through December) fell short of establishing a record for this period. This was due partly to the unusual October stock build that measured 2.3 million barrels. While the 2000-01 mid-season stock draw was the largest in 8 years at 17.3 million barrels, the largest ever stock draw was recorded during the first half of the 1989-90 heating season that measured 27.5 million barrels (Figure 3).

Propane Stock Draw, October-December, 1989-2000

Propane Prices Hit Record Levels
Propane prices for the 2000/2001 heating season have risen to record levels, fueled by a combination of cold weather, increasing demand, high crude oil and natural gas prices, and a significant drawdown in stocks. Since the start of the heating season, residential prices have risen 43 cents, from 127.2 to 170.2 cents per gallon. The East Coast and Midwest regions have both seen prices jump over 40 cents during this time period. The largest price increase has been observed in the Lower Atlantic region, where residential prices have hit 215.6 cents per gallon, up 79 cents from the beginning of October.

Tight spot markets have spurred retail prices. Mont Belvieu spot prices have averaged 77.2 cents per gallon during the month of December and 82.9 cents during the first half of January. These prices are much higher than the previous record average seen in December 1996 of 60.8 cents per gallon. Prices at Conway, Kansas (the Midcontinent benchmark) averaged 79.0 cents for December and hit a near record high of 105.0 cents on January 8, 2001. (The record is 107.5 cents posted on December 16, 1996.) Prices have more than doubled from one year ago. High spot prices have been driven by record high natural gas prices, which have prompted cutbacks in the production of propane. (Figure 4.)

Monthly Propane, WTI, and Natural Gas Prices, October 1990-December 2000

Contrary to today's market, propane retail prices during much of the 1990's were relatively stable, with the exception of the 1996/97 season when prices escalated, reaching 146.1 cents per gallon in New England and 141.0 cents along the rest of the East Coast. The Midwest reached a high point of 130.7 cents in December 1996 before quickly dropping back down and finishing the heating season at 92.7 cents per gallon. Similar to the current heating season, propane markets experienced pressure from colder than normal weather but also entered the heating season at lower than normal stock levels and with large demand for crop drying.

The 1999/2000 season, however, witnessed a dramatic upturn in propane markets. In February 2000, prices along the Eastern Seaboard hovered around 145 cents per gallon, while the Midwest average broke the 100-cent barrier in February for the first time since February 1997.

Current market conditions seem to indicate that prices may be beginning to decline. Temperatures in recent weeks have been relatively mild in much of the country, and the severe Midwestern storms of December have not continued into January. Despite recent increases in crude oil prices, spot propane prices have begun to decrease, by about 15 cents over the past couple of weeks, after climbing over the 90-cent mark towards the end of December. (Figure 5.)

Daily Propane and WTI Prices, October 2000-mid January 2001

While recent weather has not been as cold as was seen in late 2000, problems related to propane supply have continued, keeping prices relatively high. However, if the weather continues to moderate and propane supply returns to more normal levels, some softening in propane prices could be expected over the balance of this winter.



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