SIMON SAYS: Maybe it’s like buying a new car but keeping it in the garage

Submitted by Simon Hill on Sun, 11/03/2019 - 17:00
Maybe it’s like buying a new car but keeping it in the garage

We make decisions every day, some good ones and some bad, normally those judgements are made to get things done, but on occasions traders will decide to do nothing, to wait, for a market to move to their desired target, or to wait for something to just change. As we approach a significant period in the year, where seasonality starts to have an increasing influence on our market, traders are naturally a little hesitant, waiting and wondering what happens next. A good bullish run is what traders really need, but they also cause the dynamics of the market to change, and to bring into question how long such runs can continue. The market feels a little hesitant at the moment, so should we stick or twist?

Since I got back from my summer jaunt to Ibiza in Spain, mysteriously propane in Mont Belvieu has moved up by nearly 20%, while WTI crude oil has gyrated within that mid $50/ Bbl range, albeit after a jump up and down after the drone attack in Saudi Arabia back in mid-September. The result is that the Mont Belvieu propane to WTI ratio is up, from around 30% in early September to 38% today, and it seems to have happened without too much clatter, but why?

I’ve felt propane in the U.S. was due to gain some ground, after reaching levels against WTI crude oil that are the lowest since 2001. There’s been some cooler weather over the last few weeks across a lot of the U.S., but it’s cold enough to get propane sales at the customer level significantly up; not yet anyway. In addition, propane has just about taken over from normal butane as the best feedstock for U.S. petrochemicals, as margins for normal butane have slipped to about 15 cents/gallon, roughly the same levels for propane and ethane, but propane just gets the nod on the line, which you would think would underpin propane pricing. So, both the weather and petrochemical margins are swinging in favour of propane, but it’s nothing that dramatic.

The same can be said of the U.S. inventories, as reported by the EIA, as it looks like the injection season is over in many players minds, but it’s only just. We’ve had two weeks of draws, but if anything, both were a little disappointing, and were less than the market expected. Especially as we are entering the true winter period in the U.S., but even though the draws are smaller, the price keeps strengthening, when we would have expected it to at least come off a little.

Maybe it’s something to do with the U.S. export component that we’re missing, even though we are always trying to interpret the reasons why propane export volumes are either up or down. Recently in a number of SIMON SAYS, we’ve talked about Enterprise’s “have they, haven’t they” expansion of export capacity at their Houston Ship Channel terminal, and I keep coming down every time on the “haven’t” side of the argument.  I think I might have a possible reason. I have a feeling the work has been completed at the dock, with Enterprise maybe choosing not to export. This might sound a little strange, but Enterprise had their earnings call just a week ago, and a little surprisingly nothing was announced on the current operational status of the capacity improvement. It just doesn’t make sense, especially as terminal fee premiums are back up to levels we’ve not seen for a number of years, and yet such levels haven’t tempted Enterprise to unleash the extra 5, or was it 10 cargoes per month that we were told would be ready by the beginning of the fourth quarter, even the end of the third?

After visiting Mont Belvieu a few weeks ago, I realise that the word complex is very fitting. Yes, there is a huge volume of storage in Mont Belvieu on paper, but there are so many companies and systems involved, that each company is linked, or not linked, to another system. When it comes to Mont Belvieu hardware, Enterprise are huge, and with size comes a lot of flexibility, but it’s all relative, and they’ve been actively trying to find more and more space to squeeze in the cheap Y-grade tons, which they have been mopping up recently in anticipation of their fourth quarter fractionation start-up. I’m not saying that there isn’t enough storage, I think the issue is more related to not enough purity propane and butane available to export. And that again means we are back to the issue of a lack of fractionation capacity.

EIA production figures over the last few weeks have at best been flat, and with refinery output rarely moving, it also means the fractionators are at best holding, or maybe even slightly down. I’m therefore thinking that for Enterprise to suddenly go out and find an extra 5-6 million barrels of propane and butane for export each month, before their fractionator starts, or for that matter anybody else’s, is a very risky strategy, even for the huge flexibility of the Enterprise system. We’ve seen that when it goes wrong, it can go big time amiss for prices at Enterprise. We’ve seen premiums and discounts versus TET, and other Non-TET, hit 10 cents per gallon twice before at Enterprise in the last 3 years, so maybe there is a worry that something along these lines might happen again. If the Enterprise system itself can’t produce the extra 100 – 150 M Bbls/d of purity volumes, and has to go and buy from other parties linked to its system, then something might give big time.

In addition, there’s been talk in the market that some contract customers are incurring small loading delays, even though others are saying loading rates have increased by nearly 20%, again suggesting the capacity increase is in place, with the likely cause of the delays being Enterprise prioritizing their crude oil liftings across the dock, reducing extra LPG export opportunities. You know what, two and two nearly always equals four!

Normally I would say that if we get less exports, then it’s more likely we’ll see reduced draws, or even increased stock levels, but I think it shows a potential issue within the overall Mont Belvieu system, namely the amount of purity, not overall but available in any one of the export driven systems, that could easily start to add upward pressure to prices. In addition, another interesting issue is developing up in the north and east of the U.S., potentially adding support to overall prices.

Retailers are starting to move propane from secondary to tertiary storages, pretty much as they normally do, but at this time of the year they’re usually able to pick up plenty of spare spot propane from western Canada, as well as the U.S. east coast. While my old company Ferrellgas are struggling to keep their heads above water, propane retailers as a whole are finding more than a few headaches this year, trying to secure extra spot supplies by truck and rail, for their PADD 1 storages. Propane from Edmonton in Canada was usually available for import by rail into the regions where winter demand was likely to be strongest, enabling secondary and tertiary storages to be filled at reasonable price levels. With the start of the AltaGas export terminal in Prince Rupert Sound, this has mopped up a lot of excess barrels in the region, with November’s export programme looking as if it will be in the order of 100,000 Mt, which is a lot of railcars not heading to the U.S. at discounted prices. Add this to a moderate increase in exports from Ferndale, again where Canadian propane barrels can easily end up, and it leaves the retailers looking to scramble, especially if there is a cold burst in the strong demand areas.

Although there are some truck and railcar availabilities in the east, the Mariner East 2 pipeline is again pushing any spare spot propane barrels for export out of the Marcus Hook terminal. In addition, there’s been very little spare propane coming up the TEPPCO pipeline in the last couple of months. The habit of storing barrels in Hattiesburg and Tirzah in recent summers has pretty much ended. To boot, in the Midwest, new truck terminals that were built to increase the coverage and flexibility of retailers in the region, due to previous shortage problems caused by the Polar Vortex a couple of years ago, are also struggling to find spare spot volumes. It’s therefore looking bleak for the propane retailers, and this could well be starting to nudge prices up in regions, filtering back to prices in Mont Belvieu.

Tomorrow I will look more at how this movement up of propane prices in the U.S. is impacting the international market, maybe traders need to be decisive!