Join Amy Strahan, editor of Argus’s NGL Americas report, and Brian O’Rourke, Argus’s Vice President of Business Development for Natural Gas Liquids and Olefins, as they discuss current inventory levels for US propane stocks, and the importance of those stocks as the Northern hemisphere moves into the winter heating season.
Amy and Brian will discuss current inventory levels relative to historical benchmarks, and key factors that could be market moving during the coming winter heating season.
Brian: Hello, and welcome to another session of Argus' "Global LPG Conversations." I'm Brian O'Rourke, vice president of business development for North America NGLs and olefins. And with me today is Amy Strahan, editor of Argus NGL Americas. Today, we are going to be discussing North American propane inventories as we approach coming winter heating season. Good afternoon, Amy.
Amy: Good afternoon.
Brian: Amy, before jumping into a discussion of current inventory levels and how they can be expected to impact the market at a macro level, what's considered to be the minimum inventory level going into the winter at which the U.S. market feels comfortable with the supply situation?
Amy: Oh, goodness. Okay. Well, roughly, say 10 years ago, before we saw these huge investments in new and expanded export terminal capacity, most market participants estimated the U.S. needed at least about 60 million barrels in stocks ahead of the winter heating season. But back then the U.S. was exporting on average about 120,000 barrels per day according to EIA's figures. This year, that export average is closer to 1.2 million barrels per day, or about two thirds of the roughly 1.8 million barrels per day we see in U.S. propane production from gas processing. So, we've seen such strong production growth that overall U.S. propane inventories fell by only 39 million barrels during the last heating season. That's, of course, between the start of October and the end of March. That tells us that the industry is really becoming a lot more efficient in moving this additional production to where it's needed most. That said, we know stocks have to be higher now to accommodate all of this additional export demand. And we started last year's heating season at 72 million barrels and some market participants suggest that stocks need to build to at least 80 billion barrels or ideally by 100 million barrels, depending on who you speak with, at the onset of the winter heating period for the domestic market to feel pretty well supplied.
Brian: Wow. That is indeed a significant change in market expectations, Amy. Having said that, can you please share with us current inventory levels and how those compare historically with recent years?
Amy: Sure. As the date of this recording, the EIA's most recent figures for the weekend of September 2nd show U.S. propane stocks at 74.1 million barrels. That's at 5.7% versus the levels we saw this time last year. That's even though we began the spring and summer building season at a big deficit versus the previous year. And that's a lot of.... a bit of a relief for a lot of people because, if you recall, when we began rebuilding stocks at the start of April, total U.S. inventories were down by 5 million barrels or about 13% versus the prior year. So, we've managed to rebuild pretty quickly this summer. Now, the caveat to all that is we're still down by about 9% in stocks versus the average for the preceding 5 years.
Brian: Okay. So, it looks like we're not only well below that 100 million barrel number that you mentioned to make the market feel at ease regarding supply, but we're also well below the historic comparisons over the last few years. And all this is due to exports?
Amy: Yes, yes. Exports are really what's driving these lower stocks. Even now when we're seeing a slowdown in PDH demand in China, for example, that's keeping the U.S. arb to Asia fairly tight, there's simply so much termed up volume that's being exported. It's tougher for U.S. inventories to catch up season to season. And of course this year, we're also shipping more cargoes to Europe. I took a look at NorTex data, and that showed about 266,000 tonnes. To convert that, that would be approximately 107,000 barrels per day of propane that the U.S. shipped to Northwest Europe in August, which is about four times the volume to Europe we were seeing in August 2021.
On the U.S. side though, it's kind of important to note that domestic marketers are watching a very flat forward curve which makes it more difficult to support storage economics. Late last week, for example, we were actually seeing fourth quarter LST propane at Mont Belvieu and more than one cent per gallon backwardation relative to September. And that really makes buying and storing propane a more difficult proposition. In the U.S. midcontinent, though, the curve looks more in line with seasonal expectations with fourth quarter Conway, Kansas propane at a two cent per gallon or so premium to the prompt month. So, at least for the Gulf Coast, there's less incentive to store ahead of the winter unless you're doing it, I guess, from a purely operational perspective.
Brian: Okay. So, with storage levels being well below what domestic suppliers consider optimal, what might be the repercussions this winter?
Amy: Well, first and foremost, I think it could lead to weather related spikes in pricing in the U.S. midcontinent. [inaudible 00:04:37] two inventories were 22 million barrels at the start of September that's down by 1 million barrels versus last year. And already we're seeing the north south arbitrage between Conway, Kansas and Mont Belvieu close. On top of this, there's likely to be a bit of tightness in purity propane available due to a fractionator outage in Oklahoma. I think market participants get a little leery when they recall the polar vortex of January 2014. And then we saw Conway, Kansas prices hit a 278 cent per gallon premium over Mont Belvieu during that time due to the inclement weather.
And it's important to note we're also hearing, you know, U.S. trade associations trying to reach out to their membership to get ahead of this. The National Propane Gas Association, for one, has been very vocal about encouraging members to call in truck waiting times in key terminals in the U.S. Northeast and the mid continent this winter. And it's just part of a wider industry effort to sort of help coordinate retail logistics. In some parts of the country, of course, you know, still concerns about staffing, for example, that U.S. retailers have to contend with. But just overall for the U.S. market, any run up in winter propane prices would be more likely to come from, let's say, international developments.
Brian: So, we've already seen a lot of international developments cause volatility this year, right?
Amy: Oh, yes. Well, in March news of the Ukraine conflict, which of course caused a spike in global crude and naphtha prices did push prices on the Argus Far East Index, which is the international propane benchmark in Asia that pushed FEI over $1,000 per ton. And that, of course, led to an eight year high in prices on both the AFEI and at Mont Belvieu, Texas. And since that time, you know, we've seen concerns about natural gas supplies in Europe, and that's opened up the U.S. propane arbitrage to that region as well. And of course, if Europe sees a colder than expected winter, this will force CIF ARA prices higher and could potentially drive U.S. prices higher as well. So far, you know, the only weakness really we're seeing in global propane demand in the months ahead seems to be coming from the Asia petrochemical markets. But of course, those buyers, you know, typically crack naphtha during the heating season with the exception of PDH operators, of course. So, you know, this will kind of be less of a factor keeping U.S. propane prices in check.
Brian: So, there are certainly a lot of moving parts to say the least. Well, thank you very much for your time, Amy. I guess we'll see how this winter heating season unfolds.
Amy: Thank you.
Brian: Thank you for joining us today for my discussion with Amy Strahan regarding the U.S. propane inventories, and what they may mean for the coming heating season. Thank you.