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Prices for Hydrocarbon Gas Liquids

Hydrocarbon gas liquid prices are related to oil and natural gas prices and are related to supply and demand

Prices for hydrocarbon gas liquids (HGL) are related to their sources (crude oil and natural gas) and to their demand and supply. Until 2009, U.S. spot prices for natural gas and crude oil were closely related, in terms of dollars per million British thermal unit (Btu), and the U.S. spot price for propane generally tracked closely to the spot price for West Texas Intermediate (WTI) crude oil. This historical relationship, which reflected international market trends, was based on the general assumption that most fuels are interchangeable because the United States was a net importer of propane and other HGL products. As a result, prices of HGL in the United States were bound by international market dynamics.

In 2011, the spot prices of propane at the Mont Belvieu, Texas trading hub began to move away from the spot prices of crude oil and refined products such as gasoline and naphtha (on a dollar per Btu basis). Initially, this move reflected the switch in the U.S. trade position from a net importer to a net exporter of propane. By 2013 and 2014, the surplus of propane stocks in the United States (that resulted from continuing increases in production, particularly from natural gas processing plants) began to exceed the capacity of export terminals to send the product to overseas markets, depressing the U.S. price of propane even further.

Normal butane prices began to exhibit similar behavior in early 2012, and isobutane prices began to fall closer to propane prices by early 2013, reflecting the high cost required to move U.S.-produced HGL to overseas markets. Since early 2017, when the last of major liquefied petroleum gas (LPG: propane and butanes) export capacity expansion projects was completed, the difference in absolute terms (dollar per Btu) between LPG prices in the United States and in the international market has narrowed, as has the discount for LPG relative to crude oil. The export terminal capacity and growth in the tanker fleet capable of shipping LPG overseas have allowed the United States to become re-integrated into the international LPG market, though now as a net exporter rather than a net importer.

U.S. spot prices for ethane generally tracked crude oil spot prices until 2008. Gradually, as production growth in the United States overwhelmed the ability of the domestic petrochemical industry to increase its consumption of ethane, the price of this commodity delinked from crude oil prices and, starting in mid-2012, began to closely track natural gas prices. This change was the result of a lack of alternative markets for ethane, which left natural gas processors with only the option of leaving the ethane as a component of pipeline natural gas (known as ethane rejection) and therefore setting ethane prices at the natural gas heating value. Since late 2017, however, as ethane demand began to grow with the completion of new petrochemical projects and newly-built ethane export capacity allowed U.S. produced ethane to reach more distant markets, ethane prices began to move away from its link to natural gas prices, and they are now bracketed by propane at the top and natural gas at the bottom of the range.

Last updated: December 19, 2018

Retail propane prices are affected by several factors

In addition to the factors that affect wholesale propane prices, two other major factors affect the retail price for propane:

  • Levels of available supply sources relative to demand
  • Transportation costs

Propane supply and demand

Propane production is generally consistent throughout the year because it results from crude oil refining and natural gas processing. Propane consumption, on the other hand, is highly seasonal. Propane stocks, or inventories, are generally built up during the spring and summer when consumption is lowest. The stocks are then used to meet propane demand in the autumn and winter when consumption is highest. Production and stocks are supplemented by imports. Wholesale and retail propane prices can increase quickly and significantly when supply sources are insufficient or when they lack the capacity to respond quickly to large and/or rapid increases in demand.

Transportation costs

Propane consumers who are the farthest from the major supply sources will generally pay higher prices for delivered propane. The higher cost is the result of the increased cost to transport propane by pipeline and by rail to bulk distributors and from bulk distribution points to individual consumers. Congestion along rail and water routes, especially in the winter, can contribute to price increases.

Propane prices have historically been higher for consumers in states located in the U.S. East Coast region because they are farthest from sources of propane supply. Consumers with smaller onsite propane storage capacity, such as residential and commercial consumers, generally pay higher prices per gallon for propane because propane has to be delivered by truck in smaller quantities. As with most delivered fuels, the unit price (in cents per gallon) for propane is generally lower when the volume delivered is larger. Consumers in the most remote locations typically pay the highest prices for propane.

Case study: U.S. propane prices in the winter of 2013–14

Retail propane prices spiked in the winter of 2013–14 as a result of a confluence of factors. A late and large corn harvest in 2013, along with cold, wet weather, resulted in strong demand for propane by farmers in the Midwest for grain drying. After the harvest, logistical issues along supply pipelines and rail lines prevented propane stocks in the Midwest from being fully replenished before the onset of winter.

The early, and sudden, arrival of cold weather during the first half of the winter (October through December), especially in the Midwest, caused increased propane demand for space heating at a time normally used by retailers to replenish inventories before the start of the winter heating season. The low stocks, along with out-of-the-ordinary logistical constraints and increased demand, resulted in large increases in residential propane prices.

In the fourth week of January 2014, the U.S. average residential propane price reached a record of more than $4.00 per gallon, almost 75% higher than the price in the same week of 2013. The average residential price in the Midwest reached nearly $4.20 per gallon, 137% higher than the price in the same week of 2013. Prices then dropped when the supply constraints and demand eased.

Last updated: December 19, 2018