Higher inventories, milder weather, and falling crude oil and natural gas prices have resulted in a Midwest propane market that so far this winter has not experienced the challenges faced last winter, when the combination of depleted inventories and high winter demand pushed propane prices to record highs. This winter, lower demand as a result of a less-severe winter (Midwest heating degree days so far this winter are 8.5% below the comparable year-ago period) has kept Midwest propane markets well-supplied. Inventories in the region are 11.8 million barrels above the same time last year and 6.3 million barrels more than the five-year average as of January 30.
Propane is produced from both natural gas and crude oil—in 2013, about 60% of propane was from natural gas processing, while 40% was from refinery crude oil processing. Because of this split, the price of propane is related to the prices of both commodities. Since 2012, propane prices have tracked between crude oil and natural gas prices on an energy-equivalent basis. Recent falling crude oil prices have narrowed the spread between crude oil and natural gas, and, combined with inventory builds in the Midwest and Gulf Coast, led to decreases in propane spot prices at both the Conway and Mont Belvieu price hubs.
The spread between Midwest retail and wholesale propane prices prior to last winter was typically about $0.65 per gallon. This price spread reflected traditional propane supply and distribution patterns from supply sources to the wholesaler and then to the propane retailer. However, this spread increased rapidly last winter, as propane markets tightened and costs to move supplies through the supply chain increased. Although propane markets this winter are not experiencing problems, the retail-wholesale price spread has not returned to historical levels.
Changes in infrastructure, including the repurposing of the Cochin pipeline, have changed logistical networks for propane markets in the region. Propane supply networks now increasingly rely on relatively more expensive rail and long-range truck shipments. Propane wholesalers and retailers have also made changes to secure supplies well in advance of winter and have increased the amount of propane they hold in inventory. The spread, which averaged $0.86 per gallon for the month of October, an increase of $0.22 per gallon from 2013, was $1.32 per gallon as of February 2.
Principal contributor: Mason Hamilton