Crop drying season is underway in parts of the US, but higher propane demand has not been reflected in midcontinent prices, which this week hit their lowest level since July 2013.
Midcontinent propane usually strengthens in the fall, as demand for fueling heaters to dry corn and other crops picks up amid the harvest season. Given its close proximity to the nation's agricultural centers, the NGL fractionation and storage hub at Conway, Kansas, plays a critical role in supplying this market, and therefore tends to see an uplift in prices that starts in October and persists through the winter months.
But changes to key infrastructure and a weak commodity price environment have kept prices down.
In July, Kinder Morgan reversed its Cochin pipeline, a long-haul system that historically moved propane from Alberta, Canada, into the US midcontinent. The reversal of that line to move diluent into the western Canadian oil sands hub saw propane wholesalers and retailers secure more product ahead of the fall crop drying season to mitigate the risks and uncertainty of losing that critical transport system.
While this pre-buying activity lent support to prices during the shoulder months, the ample supplies of propane that followed have helped spot prices soften during October.
In July, Conway propane values averaged 105.66¢/USG, but this month prices averaged 98.8¢/USG. In the past four years, the average July price of Conway propane has averaged an 18.45¢/USG discount to the October average.
The recent drop in crude prices has also exacerbated this weakness, with propane often moving in lockstep with the WTI benchmark in recent sessions. While outright propane prices are down nearly 12¢/USG year-over-year, their value relative to crude is only 240pt higher than the prior year's average, at 48.2pc.
As commodity prices remain weak, this week's reports of increased harvest activity and trucking demand has done little to support propane, with Conway averaging 88¢/USG the past two sessions, marking its weakest level since July 2013.
But what midcontinent lacks in support for pricing it has made up for in spread liquidity, with traders stepping into the market to play the wider arbitrage between Conway and the other major propane hub in Mont Belvieu, Texas. This week alone has seen at least 395,000 bl exchanged between hubs, with Conway reaching a 4¢/USG premium to Mont Belvieu hubs. This time last year it averaged a 3.3¢ discount to the Gulf coast.
The uptick in spread activity comes as some participants have expressed concern that the crop drying season may get into full swing later than usual, as weak corn prices has incentivized farmers to dry crops in the field for as long as possible.
Although major hubs are well supplied with propane, the market has seen few new meaningful methods of transporting propane come on line in the past year, which could see spot prices surge due to logistics constraints.
The United States Department of Agriculture is forecasting corn production to total 14.5bn bushels this year, up 1pc from recent forecasts and up 4pc from the prior year's record crop. Soybean production is also forecasts to hit record levels, of 3.93bn bushels, marking a 17pc increase from 2013.
eh/tdf
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