CHICAGO, Ill. — U.S. inventories of propane (LP) and propylene have hit a record high of 97.7 million barrels, according to the U.S. Energy Information Administration (EIA), the highest level since the agency started collecting weekly propane inventory statistics 22 years ago.
"It is a propane world," said Phil Flynn, futures account executive for the Price Futures Group, located at the Chicago Board of Trade, of the Sept. 21 report. "Farmers will love it."
Over the last six months alone, the EIA said, LP and propylene inventories were 24.3 million barrels higher on average as of Sept. 11, compared to the same period in 2014 – and expected to reach 99.1 million barrels by the end of September. In addition, in the past year, nearly all of the stockpile increases in LP inventories occurred in the Gulf Coast Region.
"We haven’t been anywhere close to this," said Mark Rachal, director of research and publications at Cost Management Solutions, LLC, a propane marketing and consulting firm in Livingston, Texas. "We’ve already leveled out on the building of inventories. A lot of people are holding propane more than they normally would."
In fact, Rachal said total U.S. LP production fell below last year’s rates over the last several weeks, which, he added "is a very significant development that we will need to watch closely."
"For more than two years, U.S. propane production set five-year highs each week," he said. "However, production began to level off in May and showed essentially no growth throughout the summer."
As production of LP and other hydrocarbon gas liquids (HGL) has grown, the EIA said the ability to transport, store and export these commodities has expanded.
"During the first six months of 2015, production of propane at natural gas plants was 31.3 million barrels, or 172,000 barrels per day (b/d), higher than during the first half of 2014," the agency said. "Exports increased by 33.3 million barrels (182,000 b/d) over the same period."
Traditionally, the EIA explained, LP and propylene stocks increase from the start of April to the end of September, drawing down from October to March, when agricultural and heating demands increase. But in 2015, LP inventories began increasing in mid-February, more than six weeks earlier than the historical average.
With domestic consumption relatively flat, the report added, growing LP production at natural gas processing plants contributed to this year’s strong inventory build, while also supplying more LP to the global market via exports.
"Retail demand is stagnant," Rachal said. "Real growth, domestically, for the use of propane is in petroleum. To build the market, you have to export. We’re shipping to South America, the Caribbean, Japan, China and Europe. You have to start shipping away at the supply side. If we start slowing down supply, the demand side will catch up."
While LP is produced at natural gas processing plants or petroleum refineries, expanding shale gas and tight oil development continue to be the main driver of LP production growth, with refinery LP production remaining relatively constant, the report said.
"There has been a significant number of refinery upsets that could have contributed to the decreased production over the last (several) weeks," Rachal said. "If this downtrend in production continues to develop, it will be one of the most bullish fundamental developments for propane in a long time."
Clarke McGrath, on-farm research and extension coordinator at Iowa State University’s Iowa Soybean Research Center in Harlan, who formerly worked in propane retail sales, said many growers have already locked in a higher-than-average amount of LP in the last couple of months. Prices were lower than they had probably seen in more than a decade.
"A few growers I talked to had taken another angle at it," he said. "They had locked in a portion of their needs in mid-summer, then locked in a little more in late summer. (They) were going to either lock the rest in right ahead of harvest, or just buy the remainder at the rack price if it was even lower than the pre-paid or pre-booked LP was."
One thing McGrath said he learned when he used to price out propane was the market can move quickly and unexpectedly. "If a grower is relatively risk averse, and they feel like the current price they can lock in is fair, it is hard to argue with locking in a good chunk of your projected needs to cover your upside risk.
"It looks like we will continue to have some of the most favorable LP prices since the early 2000s," he added. "Even though, typically, gas production slows in the winter months and the U.S. now exports what I understand to be near-record amounts of LP, the high inventory and relatively-stable demand should mean great supply, and low, stable pricing for most LP customers."
Despite this increase, Rachal noted there are some questioning the EIA’s production data, saying it may be incomplete. "In our view, the potential impact on propane pricing is the same regardless of whether there are gaps in the data from the EIA," he said.
"The important thing here is not that the total production number accounts for every barrel of production, but rather that the data show a developing downtrend in production."
The EIA said natural gas plant production of LP, which reached a monthly high of 1.13 million b/d in April, is forecast to decline slightly in the first quarter of 2016 before rising to 1.19 million b/d by the fourth quarter.
