US propane spot prices plummet to more than 13-year low

FOCUS article by Bobbie Clark

HOUSTON (ICIS)–US propane spot prices have fallen to their lowest level in more than 13 years as supplies and production continue to grow with no new demand outlets.

Propane spot prices at the Mont Belvieu hub in Texas were assessed at 34.00 cents/gal on Friday, the lowest price since 1 March 2002, when they were at 33.50 cents/gal.

Prices were pressured in the short-term as a recent spate of heavy rains in Texas caused problems with underground storage in salt caverns.

These salt caverns are full of saturated brine, a combination of salt and water. When propane and butane, also known as liquefied petroleum gas (LPG), are pumped into the caverns for high-pressure storage, the brine is displaced and usually held in retention ponds.

The recent storms in Texas have diluted these brine ponds, which would make for unstable storage conditions in the salt caverns. If the diluted brine is pumped back into the caverns, the salt that make up the cavern walls will dissolve, enlarging the cavern, which would be potentially catastrophic in a highly pressurised environment.

As a result, the propane market has become oversaturated, as product had to be put out into the market for sale instead of storage.

However, the propane spot prices were already on the decline. The downturn in the crude oil markets also helped pull propane prices down.

Prior to this week, prices had fallen by 58.6% since 20 June 2014, when prices were at an average of 108.88 cents/gal. Last week, they were at 45.13 cents/gal.

Propane production has been near-record levels since hitting an all-time record of 1.672 bbl/day for the week ending 14 November 2014, according to the US Energy Information Administration (EIA).

The latest EIA statistics revealed that production was at 1.652m bbl/day for the week ending 22 May, up from 1.627m bbl/day the prior week. Year on year, production is up by 4.0% from 1.588m bbl/day.

Supplies have also been on the rise, on the seasonal downturn in demand. The spring and summer serve as the storage season for propane.

While propane exports have remained strong, they have been on the decline in recent months. After rising to an all-time record of 661,000 bbl/day during February, they fell to 470,000 bbl/day the following month, according to the latest data from the EIA.

A trader said there will need to be a significant increase in exports or the discovery of a major untapped market to provide any real upward support of prices.

Both of which are unlikely, at least over the next year or two, the trader said.

Another factor weighing on the propane market is the displacement of Canadian propane imports into the US Midwest, where burgeoning production and supplies from the Marcellus and Utica shales have begun to serve the retail markets in that region.

“Additionally, local supply is significantly surplus to offseason demand but midstream companies have not yet developed any major underground storage caverns for the local market,” said Dan Lippe, the founder of Petral Consulting Company.

As a result, all that extra propane from Canada has to be shipped via railcar for storage in other regions across the US.

“Additionally, propane prices in well in Mont Belvieu have to a minimum of 28-30 cents/gal less than CIF prices in northwest Europe to be competitive with North Sea and Algerian supply,” Lippe added. “Based on the spot price in northwest Europe in late May, prices in Mont Belvieu would have to be 29-34 cents/gal to be competitive on full delivered cost basis.”