An Analysis of U.S. Propane Markets Winter 1996-97
June 1, 1997
Executive Summary
In late summer 1996, in response to relatively low inventory levels and tight world oil markets, prices for crude oil, natural gas, and products derived from both began to increase rapidly ahead of the winter heating season. Various government and private sector forecasts indicated the potential for supply shortfalls and sharp price increases, especially in the event of unusually severe winter weather. Following a rapid runup in gasoline prices in the spring of 1996, public concerns were mounting about a possibly similar situation in heating fuels, with potentially more serious consequences.
In response to these concerns, the Energy Information Administration (EIA) participated in numerous briefings and meetings with Executive Branch officials, Congressional committee members and staff, State Energy Offices, and consumers. EIA instituted a coordinated series of actions to closely monitor the situation and inform the public. This study constitutes one of those actions: an examination of propane supply, demand, and price developments and trends.
EIA’s approach focused on identifying the underlying reasons for the tight supply/demand balance in the fall of 1996, and on examining the potential for a recurrence of these events next winter. Because of the relative lack of public knowledge regarding propane supply, demand, and markets, it was decided that a comprehensive review of background material should be presented along with the study to enhance understanding of the relevant causes and consequences examined. Chapters 2, 3, and 4 of this report comprise an explanation of the fundamentals of propane supply, demand, and markets, largely for those readers not overly familiar with the industry.
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.
The fall 1996 period was the fourth time in the past decade in which propane prices rose rapidly over a very short period of time. Spot propane prices at Mont Belvieu, Texas, and Conway, Kansas, the major propane storage and distribution centers in the United States, rose together from about 36 cents per gallon at the beginning of August to 50 cents by the end of September, the traditional beginning of the heating season (Figure E.1). Propane prices stood at the highest pre-season levels since 1990. They continued to rise through October, and in November, Conway prices soared, peaking at 107.5 cents per gallon on December 16. Mont Belvieu prices stayed high, but did not follow Conway’s rapid ascent, peaking at 70.3 cents on December 3. Both Conway and Mont Belvieu prices fell in mid-December, with Conway falling faster and reaching parity with Mont Belvieu by mid-February. Retail prices downstream from Conway and Mont Belvieu lagged behind changes in spot markets with significant regional differences, but all propane prices returned to more seasonal levels by March.
EIA’s analysis concluded that winter 1996-97 propane market behavior can be explained by a combination of fundamental market factors, as follows:
- Continued high crude oil prices supported both Mont Belvieu and Conway prices through
the remainder of the winter. However, Conway prices rose much more rapidly than those
at Mont Belvieu, due to colder-than-normal weather in the Midwest through December,
following extraordinarily strong Midwest demand in October and November that depleted
Midwest stocks prior to the peak demand months.
- Crude oil prices remained high through December, providing no relief to propane prices. Crude prices alone probably would have kept propane prices through December higher than those of the previous year, but other factors caused propane prices to rise well above the crude oil influence.
- The Midwest started the heating season with stocks only slightly lower than normal, but high demand in October and extraordinarily high demand in November from crop drying and unusually cold weather drew PADD 2 stocks down to 22 percent below their 5-year average by the end of November. A similar situation, though with some differences in timing, occurred in late 1992 and early 1993. In the Midwest, stocks supply about 25 percent of demand during the months of December through February, and the upper Midwest is relatively isolated from Mont Belvieu supplies. End-of-November stock levels in the Midwest were not high enough to sustain even normal stock draws during the next three months without dipping below minimum working stock levels.
- With forecasts for very cold weather to continue, and the inherent inflexibility of the supply system to provide additional stocks quickly, marketers rushed to obtain available supplies, bidding up Conway prices well above Mont Belvieu in November and December. The price difference rose high enough to attract some rail and truck transportation from Mont Belvieu. Mont Belvieu prices were pulled higher in response to Conway, despite the fact that areas served by Mont Belvieu had experienced a mild December, which allowed Mont Belvieu stocks to recover toward normal levels.
- Finally, in December, as temperatures in the Midwest returned to more seasonal levels, and those in the rest of the country were warmer than normal, prices began to fall. By January, even though major areas in the Midwest were still colder than normal, the mild weather in areas outside the Midwest, coupled with falling crude oil prices, caused both Mont Belvieu and Conway prices to tumble rapidly back to more normal levels.
This examination of propane supply, demand, and market conditions during the winter 1996-97 contains implications for future heating seasons. Without significant and unexpected improvements in industry infrastructure (e.g., increasing pipeline capacity between major storage hubs or secondary storage capacity), U.S. propane markets, particularly in PADD 2, will likely continue for the foreseeable future to be susceptible to the type of regional supply squeeze that was seen during the past winter. Propane demand is expected to continue to grow at a slow but steady pace, while domestic propane production is limited by refinery capacity and natural gas production. Infrastructure improvements are very expensive, particularly for gas liquids, which must be stored in pressurized tankage. Finally, options available to consumers are limited, as home storage tanks are most often owned and controlled by suppliers.
The outlook for propane supply and prices during the 1997-98 heating season, based on limited indicators available at this time, appears to be significantly more favorable for consumers than that of the past winter. Several factors drive this assessment:
- World crude oil price levels, underlying all petroleum product markets, are widely
expected to be significantly lower in the fall of 1997 than in 1996. While average fourth
quarter 1996 world crude oil prices were more than $6 per barrel above those the previous year,
EIA forecasts fall 1997 prices to reflect a decline of more than $3.50 per barrel from 1996. A
building surplus in world crude oil supplies, as rising production outstrips demand, has resulted
in a drop of over $6 per barrel since the beginning of the year, with prices expected to stabilize
somewhat over the remainder of 1997.
- Assuming the return of both heating demand and the size of the corn crop to average levels,
fall propane demand in PADD 2 should be well below the record levels seen in 1996;
however, PADD 2's demand declines could be tempered by demand increases in PADDs 1
and 3, which experienced warmer-than-normal temperatures this past winter. PADD 2
demand in October and November 1996 was 23 percent greater than the 5-year average, fueling
the strong stock draw that pushed regional prices to historical highs. A presumed return to
normal seasonal demand levels would remove a major potential source of regional price
pressure. In spite of PADD 2's colder-than-average weather, the U.S. in total experienced a
warmer-than-normal winter. Normal weather next winter could result in higher total propane
demand than that seen in winter 1996/97, which would keep U.S. average prices from declining
as much as the other factors discussed on this page might imply.
- The significantly higher season-ending propane stock levels in March 1997, compared to
the previous spring, should allow for higher beginning stocks this fall than in 1996. Despite
a relatively normal 1996 off-season stockbuild, the low spring stocks carried over to similarly
diminished starting inventories for winter 1996/97. Propane stocks ended this winter about 4.4
million barrels higher than the previous year overall, including a 3.3-million-barrel surplus in
PADD 2 alone. Assuming a typical summer build, propane inventories could enter the 1997-98
heating season above the 5-year average level both nationally and in the vulnerable PADD 2
region. Thus, even though a return to normal temperatures nationwide may mean higher demand
in PADDs 1 and 3 next winter than winter 1996/97, stocks in all areas are likely to be at or above
normal levels, and thus able to serve the higher demand adequately.
- High levels of refinery inputs expected through this spring and summer, in order to meet gasoline demand, will also result in higher domestic propane production. If refinery runs reach expected levels, as much as 6 thousand barrels per day of additional propane will be produced, further facilitating the summer stockbuild.
In short, with pre-season stocks expected to be above average relative to recent history, and Midwest demand not likely to repeat last winter’s early surge, propane markets may be well-supplied during the peak portion of next winter’s heating season.