Exporters confident about propane supplies despite prices decoupling with oil

Propane prices have remained strong recently despite declines in crude oil prices based on expectations that surging propane exports could lead to shortages next winter. Despite growing tightness in supplies, exporters expect propane production to grow.

Prices decouple as inventories fall

The price relationship between propane and crude oil has become disconnected recently, as oil prices have fallen on continued record inventory levels and signs that exports from OPEC members remain relatively high. Propane prices have held firm based on a severe drop in inventories, mainly resulting from a surge in exports, and have buoyed the price of the average barrel of natural gas liquids.

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"We are entering a spring and summer propane inventory 'build season' with unprecedented export capacity," Jon Miller, marketing representative for NGL Supply Wholesale and author of the newsletter, said in a note March 15. "We don't yet know what export levels will be this summer, but there is a good chance they won't be less than last year's levels."

Inventories of propane and propylene were reported by the U.S. Energy Information Administration at 44.47 MMbbl in the week that ended March 10. That compares to a cycle low a year earlier of 62.23 MMbbl in the week that ended March 18, 2016. The surplus to the five-year average of 23.98 MMbbl in the week that ended March 18, 2016, turned into a deficit of 1.14 MMbbl in the week that ended March 10.

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The shortfall from last year has been encouraged by significant gains in exports, which averaged 984 Mbbl/d in the four weeks that ended March 10, compared to 632 Mbbl/d in the four weeks that ended March 18, 2016.

J.D. Buss, trading manager at Twin Feathers Consulting Inc., said we could be within one to two weeks of inventory builds resuming for the summer, but calculated that inventories could draw down severely next winter and potentially be short a year from now.

"Building a strong 40 MMbbl puts the start of winter inventory at 85 MMbbl. Throwing in an extra 5 MMbbl of demand (which is highly conservative) for a typical winter, the implication is that we could see ending inventory levels in March 2018 at 20 MMbbl." Buss said. "The only factor that remedies this situation will be price."

Propane has traded at about 48.6% to the value of crude oil on a weekly basis going back to the beginning of 2016 but narrowed to a high of 68.4% in the week that ended Feb. 3. The surge in the spread occurred shortly after the EIA reported a record level of exports in the week that ended Dec. 23, 2016, of 1.31 MMbbl/d. Near the same time, the inventory surplus to the five-year average fell into a deficit for the first time since the week that ended May 30, 2014, when the market was recovering from the severe shortages associated with crop drying and the polar vortex.

The surge in the price ratio approached the same level at the height of the polar vortex year of 69.5%, achieved in the week that ended Feb. 7, 2014, and correlates strongly with the surplus/deficit shown on an inverted basis.

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Exporters optimistic on supply growth

In quarterly earnings conference calls held recently, executives did not address the shrinking level of inventories but did discuss their expectations for growing abundance in supplies.

"[I]n our view, we've maintained that the NGL supply-demand balance in the U.S. is essentially long all the hydrocarbons," Mike Hennigan, president and CEO of Sunoco Logistics Partners LP, said on a conference call Feb. 22.

At Targa Resources Corp., the company will invest $400 million across its gathering and processing footprint based on increased activity it is seeing in many of the producing areas it serves.

"As we look forward to the rest of 2017 and beyond, the oil-driven U.S. E&P activity is expected to increase domestic NGL production, which should solidify the U.S.' position as one of the leading sources of low-cost [liquefied petroleum gas] supply," Scott Pryor, executive vice president at Targa Resources, said on a conference call Feb. 15. "Globally, we are seeing the positive impact of OPEC production cuts through a tightening of LPG volumes available from the Middle East. This may further highlight the U.S. as the fastest-growing provider of LPG supply to the global market."

Better supplied market vs. higher prices

Sunoco Logistics announced that it is proceeding with its ME 2X project, which will supplement volumes from its Mariner East and Mariner East 2 pipelines after it received permits from the Pennsylvania Department of Environmental Protection. The pipelines will bring NGLs from eastern Ohio and western Pennsylvania to Marcus Hook, Pa., for both export and consumption.

The Mariner East 2 pipeline will have initial capacity of 275 Mbbl/d and is expandable to 450 Mbbl/d, while the ME 2X line is expected to add another 250 Mbbl/d in capacity.

Hennigan said ME 2 is scheduled for completion in the third quarter and will be in service ahead of next winter and be able to supply local propane markets.

While the pipeline projects in the Northeast will ensure adequate winter supply for space heating customers in the region, they will also supply export markets and growth in petrochemical projects in the developing Marcus Hook Industrial Complex.

"We've had discussions with many companies who have interest in manufacturing in Marcus Hook, that have been waiting on the Pennsylvania DEP permits to be issued," Hennigan said. "Now, those discussions can re-energize and move forward."

Targa also expects NGL production volumes to continue growing as demand for component products increases.

"The outlook for increased ethane recovery in 2017 and beyond, driven by growing petrochemical demand from the large-scale PetChem facilities scheduled to come online beginning later this year, will drive fractionations volumes higher," Pryor said. "Overall, increased domestic exploration and production activities will also drive fractionations volumes higher."

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