U.S. propane prices have declined from multiyear highs, while inventories remain below average

After reaching multiyear highs in March, propane spot prices at the Mont Belvieu distribution hub have steadily declined. Propane prices reached $1.64 per gallon (gal) for the week ending March 11, 2022, the highest inflation-adjusted price since February 2014 (Figure 1). Similar to other petroleum product prices, propane prices are highly correlated with crude oil prices; propane prices have been increasing along with Brent crude oil prices. Propane prices have declined by 32% since March to $1.11/gal for the week ending July 22. U.S. propane inventory levels, which are below the five-year (2017–21) average so far this year, would typically place upward pressure on wholesale propane prices. This year, however, propane prices have declined below their March highs and, in relative terms, below crude oil prices because growth in ethane feedstock demand has outpaced growth in propane demand and forecasts call for a relatively early and dry corn crop.

The propane storage injection season typically runs from April to October, followed by a withdrawal season during the winter heating months. In some years, when the corn harvest is delayed or if corn grain moisture is too high, an early spike in storage withdrawals may occur in response to high propane demand for commercial grain drying throughout the Midwest (PADD 2). For the week ending July 22, we reported U.S. propane inventories at 61.8 million barrels, about 8.3 million barrels below the five-year average and at the bottom of the five-year range. From the first week in April through July 22, U.S. propane inventories built by 27.4 million barrels, faster than the five-year average. Although domestic demand has been relatively flat, U.S. exports have increased as a result of high global demand, resulting in slow inventory builds.

The Midwest is the largest source of domestic propane demand and frequently uses in-region inventories to absorb seasonal peaks and troughs in propane supply and demand imbalances. In addition to grain drying demand, 37% of the more than 6 million U.S. households that report using propane as a primary space heating fuel are located in the Midwest. Propane inventories in PADD 2 began the winter heating season about 1.8 million barrels below the five-year range for the week ending October 1, 2021 (Figure 2). A relatively warm start to winter 2021 allowed PADD 2 propane inventories to fall back within range and reach above average levels. Cooler-than-normal temperatures in January 2022 resulted in more inventory draws, and by the end of the heating season in March 2022, inventories were again below range.

Faster-than-normal inventory builds starting in May resulted in Midwestern PADD 2 propane inventories moving back into the five-year range, but they remain about 1.5 million barrels below average. Grain drying demand can significantly affect propane inventories in the Midwest. About 90% of the U.S. corn crop is grown there, and if the corn crop matures late (at the end of October or later) or has a high moisture content at harvest, producers use grain dryers, primarily natural gas-fired or propane-fired, to reduce dry the grain enough to make the grain marketable. However, when the corn crop reaches maturity in late September or early October, producers can delay harvest to the end of October and allow the crop to dry in the field, reducing propane demand for commercial grain drying. This year’s corn crop was planted later than usual (Figure 3), initially suggesting a later-than-normal harvest and a higher likelihood for more propane grain drying demand this year. However, favorable weather in the Corn Belt starting in May allowed producers to accelerate planting, resulting in plant emergence (when the corn plant sprouts above the soil surface) occurring in-line with the five-year average. This year’s corn crop is currently in the silking stage (when silks extend outside the corn husk), and reported crop progress is on par with the five-year average. If this trend continues, the crop will reach maturity in about mid-October.

The Gulf Coast (PADD 3), where most U.S. petrochemical consumption and export capacity for propane are located, accounts for about 47% of propane storage capacity. During the 2021–22 winter heating season, high global demand for propane kept propane inventories lower than the five-year range (Figure 4). Because we added large end-user storage facilities in our weekly inventory data starting with the week ended April 8, our weekly data cannot be compared year-to-year. Comparing the current rate of weekly inventory growth starting on April 8 (with monthly totals as a baseline) with inventory growth in prior years, inventories (including propylene held at refineries) built at a rate of 11% more than the previous five-year average for both April and May. Since the week of May 20, 2022, inventory builds in PADD 3 have flattened because of higher propane exports that have been above the five-year range since that same week.

Global demand for propane has risen because of its rising use as a petrochemical feedstock in propane dehydrogenation (PDH) units and flexible feedstock crackers. U.S. exports to Asia have grown rapidly as consumption of propane as a petrochemical feedstock, as well as consumer demand, has increased in recent years. Since January 2022, about 52% of U.S. propane exports have gone to markets in Asia (Figure 5), mostly to Japan, China, and South Korea. Demand for propylene, a base chemical used to manufacture polypropylene (a polymer used to produce car interiors, packaging, and personal protective equipment), increased consumption of propane as a petrochemical feedstock. As a result of Europe’s shift in energy supply following Russia’s full-scale invasion of Ukraine, U.S. propane exports to Europe averaged 253,000 barrels per day from January to April 2022, a 36% increase compared with the same time last year. High naphtha prices have also made propane more competitive for flexible feedstock crackers in Europe.

For questions about This Week in Petroleum, contact the Petroleum and Liquid Fuels Markets Team at 202-586-5840.