SIMON SAYS: What Goes Up Must Surely Come Down!

Submitted by Simon Hill on Sun, 10/04/2020 - 17:00
What Goes Up Must Surely Come Down!

I know you must be thinking this has something to do with President Trump’s, or for that matter Prime Minister Johnson’s, current poll ratings, but I can assure you it’s not. What’s “Up” at the moment is the amount of propane being held in inventory across the U.S., and it’s already pushed above 100 million Bbls. So while the Trump vs Biden reality show was hitting the screens States side of the pond on Wednesday night, it would have been easy to say that the EIA stock report milestone, released a few hours earlier, might easily get overlooked. And now with President Trump and his wife testing positive for coronavirus, it’s easy to see where the news spotlight will be pointing in the next few days, but don’t worry, I feel we will be seeing higher viewer ratings each Wednesday as the EIA’s weekly inventory blockbuster is released.

I know what came to my mind nearly six months or so ago, when trying to decipher what on earth was going to happen to U.S. propane production, as the WTI crude oil price fell, and fell again. It would have been easy to get comfortable with a price hovering closer to $20/ Bbl as a result of demand destruction suddenly stopping the world using oil. I calculated on the back of an envelope that 1,800 M Bbls/d of propane production seemed plausible. It was easy to believe therefore that concerns over propane inventory levels would simply not be a factor this year, how wrong was I?

Wednesday’s tally of 102 million Bbls, released by the EIA, was the largest since November 2015, and is only 800 M Bbls short of the all-time record high. But, what’s behind this swollen number, should we be overly concerned, and what can we expect to happen in the weeks and months to come?

I believe we have all been surprised how well the price of crude oil has stood up under the devastating impact of coronavirus on its lifeblood, the transportation sector. Some may say that this is more a result of money flows than the physical reality of supply and demand factors. And again we do tend to watch OPEC cuts and US rig/ production data a little more closely than the more fuzzy demand numbers. The stronger than expected price levels of $40/ Bbl for both WTI and Brent has deferred any impending Armageddon in the U.S. oil patch, especially for the Permian basin. Although the Baker Hughes rig count has been continually pessimistic week-on-week, the ability to tie in previously drilled wells, DUCs as the oil boys call them, “drilled but uncompleted”, has meant production in oil sweet spots has been able to respond faster in spite of little new exploration. This meant that propane production didn’t collapse below 2,000 M Bbls/d.

In addition, all that Y-grade amassed in Mont Belvieu storages in 2019, prior to the start of new fractionation capacity in 2020, is now being processed to keep the fracs as busy as possible. This is showing through in the production numbers, although its impact should have already been counted in 2019 storage numbers, albeit with a hint of guesswork. Production has also benefitted from transportation demand in the U.S. coming slowly back, increasing refinery running rates and therefore adding back more propane barrels.

Although last week’s production number was back up at 2,351 M Bbls/d, the highest since early January this year, the story is not all about supply recovering faster than expected. Although the EIA weekly numbers can be a little confusing when it comes to demand figures, hidden in this ambiguous “Product Supplied” heading, the propane retailers have certainly been conscious of all the uncertainty prevailing in the market over the last six months or so. Getting a grip on whether supply would come back to previous levels has been a primary concern of players whose interest is more in upcoming winter demand, and the ability to ensure supply, as well as safeguarding profitability. It’s been a tough road, initial concerns over Marcellus/ Utica production, close to the key winter demand hotspots in the north-east, coupled with inflexible contracts to export LPG out of Marcus Hook, has pushed retailers to enter the market earlier than they would have expected. With further worries over Permian, as well as sturdy export numbers, especially with the initial spurt to India and beyond, it’s seen the retailer take refuge in buying summer inventory. In a way this has kept Mont Belvieu prices high enough to keep the ARB slightly ‘a jar’, and uncompetitive enough to stop the flexi petrochemical buyers from eating-up propane.

The retailers have also had to build-in the impact of potential weather patterns hitting North America this winter. The EIA have forecasted that the HDDs (Heating Degree Days) will be a lot colder than we have seen in recent years, and then there’s “The Old Farmer’s Almanac” who appear to be at a slight tangent, predicting a “light winter” for most of the U.S., with warmer than normal temperatures for a large part of the country, but a degree of “uncommonly chilly” weather appearing in western states and northeastern New England. I guess a little comfort for the propane retailers. I’m also being told that the opening-up of outdoor eating areas, especially in New York City, with the authorized use of patio propane heaters, could well bump-up demand. The person who told me will of course remain nameless, but I bet he has a few of the heaters in his garage, over bought one winter, just waiting for the market to go up! This all adds to the uncertainty being faced by the U.S. propane retailer.  

But at the end of the day it’s the ARB that ultimately drives the short to medium-term movements in U.S. stock levels. In the short-term, hurricanes and tropical storms have delayed loadings pushing domestic stock levels higher, but it’s the relative impact of such occurrences that influences the ARB. What with overflowing storages of a month or so ago now appearing to be emptying faster than was initially felt possible, coupled with Japanese weather forecasters predicting a colder than normal December 2020 to February 2021 period, and a growing interest in propane for North China, the discounts to FEI in November are fast approaching low single digits or even zero. The relative strengthening of FEI numbers compared to Mont Belvieu in the last week, has widened the ARB to the mid $130s/ Mt, while freight levels have been firm, but steady, in and around the mid $90s/ mt, and buying interest for propane exports appears to have revived. Deals are still thin, but upward terminal fee momentum is evident in the odd deal finalised above 6 cents/ gallon. If the Asian upward drive continues then more propane exports will follow, and the heady heights of propane inventory may well start to decline. And whatever good news that keeps appearing in the higher propane production numbers must surely start to ease in time, the crude oil developments in the U.S. will slow at a level of $40/ Bbl, it just a matter of time! As we say, what goes up tends to also come down!

In the meantime I wish President Trump, Melania Trump, and anyone else contracting this awful virus, a speedy recovery. Let’s hope the saying also holds true for COVID-19!