Released on April 29, 2009
(Next Release on May 6, 2009)

2008-2009 Winter Propane Market in Retrospect

With high temperatures last weekend along the East Coast providing an early peek at summer, the chill of winter is rapidly fading into what a few months from now may seem to be an appealing memory. For energy analysts, this is the season to review developments in propane markets over the past winter.

Tight winter propane markets are not altogether uncommon, but this year was particularly troublesome, especially in the Northeast. The Nation’s total supply of propane stood at roughly 59 million barrels at the end of September 2008, before the start of the heating season, nearly 6.5 million barrels below the average for the previous five years. The low inventories were the result of low imports, high petrochemical use, and production interruptions thanks to Hurricanes Gustav and Ike. The lowest stocks in the 2008-09 heating season were in New England (PADD 1A), with inventories at the end of September, 22 percent below the 5-year-average.

When severe cold arrived in New England, propane supplies tightened and distribution was disrupted. State energy offices in the region reported that propane supplies held in terminals had all but dried up from about mid-January through early February, forcing some suppliers to take extraordinary measures to secure alternative sources of supply. Long-haul trucking companies sent hundreds of trucks to Ohio, Wisconsin, Kansas, South Carolina, and Texas for supplies. In response to the tight supply situation, a total of 21 States declared emergencies to allow for hours of service relief from Federal restrictions on truck driver-hours. However, despite these problems, retail propane prices in New England and in the Middle Atlantic actually dropped below those of the previous winter.

Let’s review the factors that led to these issues last winter:

Weather
Average temperatures for the winter of 2008-09 were close to their 30-year average (1971-2000) nationwide, but colder than normal in the Northeast and Midwest. The National Oceanic and Atmospheric Administration (NOAA) had forecasted, as we reported in EIA’s Short-Term Energy and Winter Fuels Outlook in October 2008 that winter 2008-09 in the lower 48 States would be 1.7 percent warmer than the 30-year average, with near-normal and warmer-than-normal temperatures in the East Coast and Midwest regions, respectively. In fact, winter months in the Northeast turned out to be 2-4 percent colder than normal, and 8-10 percent colder than the previous winter; one of the coldest for that region in a decade. The trend continued in January 2009 when the weather in both New England and the Middle Atlantic was 14 percent and 11 percent colder than normal, respectively.

Demand
Propane demand is strongly seasonal. Consumer-grade propane demand varies from a peak of about 1,300 thousand barrels per day during the winter to a low of about 640 thousand barrels per day in the summer. Prices tend to be highest when demand is greatest, so winter prices tend to be higher than summer. This seasonal variation stems from heating by residential and commercial customers, totaling about 40 percent of annual propane demand. That demand is concentrated in the Midwest and East regions.

Almost half of the propane in the United States is used by the petrochemical industry, mainly in the Gulf Coast region. The industry switches to other feedstocks (like ethane) when propane prices rise. As a result, industrial propane consumption tends to rise during the summer and fall during the winter, counter cyclical to residential and commercial demand. In the summer of 2008, the petrochemical industry used a lot of propane, which limited inventories going into the winter.

Agricultural use makes up about 5 percent of U.S. propane demand. Though small, its concentrated use during the fall harvest can affect supply used to build inventories for winter. Agricultural demand surged after the Midwest floods in June 2008. The corn harvest was late and wet, so more propane was consumed in October and November 2008 to dry corn before it could be stored.¹

Supply
U.S. propane comes from domestic production and imports. Both petroleum refineries and natural gas processing plants make propane, mainly along the Gulf Coast. Over the past five years, refinery propane production averaged 600 thousand barrels per day, with increases in the winter and declines in the summer. However, in September 2008, Hurricanes Gustav and Ike nearly halved Gulf propane production from refineries, limiting the build of inventories for the 2008-09 winter season.

To manage winter demands, inventories grow during the spring and summer months when production and imports exceed demand, and typically peak by the end of September. During the peak demand months of December, January, and February, these inventories provide most of the supply, especially in the Northeast. Inventories in New England area remain particularly vulnerable to severe weather-related supply disruptions because of its dependence on slower, non-pipeline supplies of propane, which arrive via waterborne imports, and shipments by truck and rail.

The main way domestically-produced propane is transported to the Northeast is by pipeline. Two major propane pipelines, TEPPCO and Dixie, both issued allocations at terminals, and even shut down terminals for short periods of time to allow them to restock propane. Railroad transportation in the Northeast was also limiting supply as trains were running 3 to 4 days behind normal.

During the heating season, a number of events hindered waterborne imports. Half of all U.S. imports of propane come from Canada, making it the largest exporter of propane to the United States. However, eastern Canada experienced the same cold weather as the northeastern United States and inventories in parts of Canada were about 30 percent lower in January 2009 than January 2008.² When Russia cut off natural gas deliveries to the European Union for two weeks in January 2009, other world markets attracted propane volumes that otherwise would have come to the United States. Furthermore, Algeria, a major source of waterborne imports to the United States, was plagued with production problems due to an accident in November 2008 and severe weather in January 2009 that knocked out power to its main port and caused shipment delays. Storms and high seas also delayed a number of shipments.

Prices
As noted above and shown in Figure 1, retail propane prices in the Northeast last winter were lower than those in the 2007-08 winter season. In fact, the easing of retail prices might have been greater given trade press reports suggesting that propane retailers had purchased a large share of their propane needs ahead of the winter season as a hedge against possible price increases. Likewise, some residential propane consumers were quick to lock in their winter supplies at pre-determined prices to hedge against potential winter price spikes. The large share of retail propane supply locked into firm contacts limited the potential for the pass-through to consumers of short-term price reductions resulting from lower prices for crude oil and natural gas. As these contracts are worked off, residential propane prices should, once again, more closely reflect crude oil and natural gas price trends.

Gasoline Price Drops a Penny
The national average price for regular gasoline dropped a penny to $2.05 per gallon. The price was $1.55 less than the price a year ago. On a regional basis, price changes were small and mixed. On the East Coast, the price dropped about a half-cent to $2.04 per gallon. The average price in the Midwest slipped almost two cents, dropping below $2 for the first time since April 6 to $1.99 per gallon. The average price on the Gulf Coast remained the lowest of any region as it slipped two cents to $1.95 per gallon. Once again, the largest increase occurred in the Rocky Mountains where the price rose by more than two cents to $2.07 per gallon. On the West Coast, the price slipped a tenth of a cent, remaining at $2.28 per gallon. In California, the average price was unchanged at $2.34 per gallon.

For the second week in a row, the national average price of diesel fuel decreased. The price slipped two cents to $2.20 per gallon, $1.98 below the price a year ago. Prices in all regions of the country were lower. On the East Coast, the price dropped over two cents to $2.24 per gallon. The Midwest recorded the largest regional decline as the price dropped to $2.14 per gallon, while the average for the Gulf Coast dipped to $2.17 per gallon. For the first time in six weeks, the price in the Rocky Mountains did not increase. Moving down by nearly a half cent, the price was $2.27 per gallon. The West Coast price dropped about a penny to $2.32, while the price in California slipped two cents, also to $2.32 per gallon.

Propane Inventories Post Robust Weekly Build
Total inventories of propane posted a robust 1.7 million-barrel build last week, moving the Nation’s primary supply of propane up to an estimated 43.1 million barrels as of April 24, 2009. Moreover, with one week remaining, the April build could reach its highest level for this month since 2002. Strong imports contributed to boost inventories in the East Coast and Midwest regions with respective gains of 0.4 million barrels and 0.9 million barrels last week. During this same time, Gulf Coast inventories rose by 0.2 million barrels while the combined Rocky Mountain/West Coast region also gained 0.2 million barrels. Propylene non-fuel use inventories lost 0.2 million barrels last week and accounted for a smaller 5.6 percent share of total propane/propylene inventories from 6.3 percent from the prior week.

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