Oversupply Drops LP Gas Prices. Time To Contract For Corn Drying?
U.S. liquid propane gas inventories are building, pushing the market lower, offering farmers an opportunity to lock in fall and winter heating supplies.
While industry expert’s opinions differ on when is the best time to contract LP gas, traditionally the summer months provide farmers that shot at buying the dip in the market.
In its weekly report Wednesday, the Energy Information Administration (EIA) indicated that propane/propylene inventories increased by 3.2 million barrels last week and are about 9% above the five year average for this time of year.
On August 9th, the spot price for LP gas at Mont Belvieu, Texas, the largest U.S. heating oil supply location, was 40¢ per gallon vs. 96¢ per gallon a year ago.
A southern Iowa retailer quoted cash LP gas prices, last week, at $1.12 per gallon, 15¢ below a year ago.
In this week’s report, the EIA reported that the U.S. has 92 days worth of total LP supplies vs. 66 days worth a year ago.
U.S. LP production (494 million barrels per day), in July, was running nearly flat compared with a year ago (496 million barrels per day).
Futures Prices Lower
Dale Delay, Cost Management Solutions, sees LP prices staying lower.
“We just about have more production of LP gas than we have the ability to export or consume,” Delay says. That makes sense with the discounted pricing vs. a year ago. The production has come on at such a high level, it has discounted the current price considerably.”
At Mont Belvieu for the month of June, the average price for LP gas was 45¢ per gallon vs. 88¢ per gallon in 2018.
“In the futures market, when the winter contract prices are higher than the current month that is called a ‘contango’ market. It’s a market that is exhibiting oversupply. And what typically happens, in contango markets is as you get closer and closer to that winter month those futures values will start declining,” Delay says.
Intuitively, you might think prices are going higher, because that futures month is higher. But, it’s only telling you where prices are today for the future, Delay says.
The future months don’t have the pressures on them that the front (current) month does.
So, the LP market is telling us what the fundamentals are telling us, right now, Delay says.
“We are oversupplied and the future price will decline in value, as you get closer to it,” Delay says.
Local Level Pricing
Terry Davis, Country Propane owner in Warren County, Iowa, says that local LP prices are running 15¢ per gallon lower than a year ago.
“The U.S. supply is in a lot better shape than a year ago. However, there is a lot more supply at the Gulf, in Mt. Belvieu, Texas, vs. the other big propane supply location in Conway, Kansas. And it’s from the Conway, Kansas location where the Midwest retailers get their supplies,” Davis says.
Despite the large supplies, Davis says that farmers should not get lulled to sleep.
With the U.S. able to export between 4-6 million barrels of LP per week, it doesn’t take long to eat up that differential, Davis says.
So far in August, the U.S. propane exports totaled 93,000 barrels per day in the first week and 102,000 barrels per day the second week.
“I think that right now is a good time to contract their (farmers’) winter heating supply. It may be the best time that we have all season. We still don’t know what the size of the corn crop is going to be, yet,” Davis says.
Buy LP Supplies in August?
Farmers that are trying to determine whether to buy their fall/winter heating supplies in August may consider waiting, Delay says.
“I think we will still be facing an oversupply situation, this fall,” Delay says. Barring local issues, we are not extremely bullish on price, right now, on propane pricing. There is some talk that we may get some export opportunities. But, the way the market is trading it is telling us that there are adequate supplies and we don’t expect any pressure to push up propane prices.
There is a tradition that farmers should buy in the summer and lock in LP gas supplies.
“We believe that is not always a good strategy. Primarily because crude oil starts to hit a price peak in October, due to seasonal crude draws week after week after week. Utilization of crude oil goes down, in the fall, inventories build and that puts downward pressure on crude oil prices.
Delay added, “So, over the last 10-15 years, LP has been a function of crude oil. Well, if you’re buying propane, in August, when crude oil prices are firming, and you get to winter and crude oil is kind of weak, what are you left with. But, it’s hard to break that traditional pattern of buying LP in the summer.”
Once you understand that relationship of propane to crude, you’re eyes start getting wide open, Delay says.
While some experts say contracting LP gas in the fall is more cost-efficient than summer months, the Iowa retailer doesn’t agree.
“I’ve been in the industry for 37 years. I’ve seen the best time to contract gas was in the month of January. That normally doesn’t happen. I know that traders have always used crude oil as the driver for the commodity that you would compare LP gas to, because in the beginning propane came from crude oil,” Davis says.
Today, the large percentage of U.S. propane gas comes from the raw material of natural gas liquids than crude oil refining, Davis says.
“But, that change in the supply source has not changed the way traders look at the price of the LP gas product. They still go back to crude oil and say LP gas price is a certain percentage of the crude oil price. It’s not always true that LP gas prices follow what the crude market is doing,” Davis says.
Davis admits that there are times when the two markets move in tandem, but not always.
Crude Oil vs. LP gas relationship
Even though 75% of LP gas comes from natural gas production, when propane is a finished product it looks more like a crude oil derivative, experts say.
For instance, you have to haul LP, instead of the use of pipelines like natural gas has access to. LP gas is delivered by transport, making it look more like gasoline.
Plus, when natural gas prices jump, propane prices don’t spike with it.
For those reasons, Delay firmly believes that how the crude oil market goes, so goes the LP gas price.
A year ago, LP prices traded 50-60% of the crude price, this week LP gas futures are trading just 29-34% of the crude oil price.
“Crude is the master of propane,” Delay says. Every big move that we have had, inside the propane market, is crude-based. We’re trying to find out what the percentage of propane to crude oil based on the propane fundamentals. It’s a percentage relationship that is tied to the price of crude oil.
Delay added, “If crude drops 40%, you expect propane to be down 38-42%. Occasionally tight supplies, due to excess drying needs, will change things. But those events are unusual and short-lived.”
A better approach is looking ahead and figuring what the crude oil market is going to do and be able to figure what the propane prices are going to do, Delay says.
Crude Market Outlook
This year, there is major divergence happening in the crude oil market. This is creating a volatile outlook, for 2019/20.
On Thursday, oil prices fell by more than 8% immediately after the news of the U.S. imposing more tariffs on China, beginning in September. The news dropped West Texas Intermediate oil market below $55 per barrel and Brent crude oil price down to $61.
“If the Iranian crude oil comes back onto the U.S. market, we’ll probably see crude prices drop into the $30.00 a barrel range. But, if the Iranian oil stays away and the U.S. gets a China trade deal done, the market could go into the $70 per barrel range,” Delay says.
Message To Farmers
The demand for LP gas, regarding grain drying this fall, will depend on farmers’ location.
“Locally, for farmers in Warren County, located in south-central Iowa, a lot of corn went into the ground early. I’m not anticipating a large volume of propane for grain drying with those customers,” Davis says.
However, for the rest of the Corn Belt where farmers that fear an early frost and pick corn early, that’s corn that will need to be dried in the bin. As a result, the demand for LP gas will increase, Davis says.
So, there could be a lot of crop drying, depending on the fall weather.
Farmers should talk to their suppliers and get gas locked in, the Iowa retailer says.
“It’s imperative to get some supply locked-in. I know that farmers can’t look into a crystal ball to know what exactly they are going to need, but at least they can get 75-80% booked,” Davis says.