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Trader’s Corner, a weekly partnership with Cost Management Solutions, analyzes propane supply and pricing trends. This week, Mark Rachal, director of research and publications, discusses opportunities and guarding too closely against possible threats when it comes to buying propane supply.
Catch up on last week’s Trader’s Corner here: Clash of the titans: Propane production and exports
We want to take you back to the Trader’s Corner written on April 12 and released on April 15. It was entitled “Looking forward to next winter and beyond.” On the day that article was written, Mont Belvieu ETR propane closed at 81 cents and Conway at 77 cents. They had closed at 86 cents and 81 cents, respectively, one week before.
We made the following statement, “With the recent pullback in prices, values look better for the winter of 2024-25 but still a little pricey. Pricing for the further-out winters looks better.”
Later in the article, we said, “Nevertheless, between now and the end of June, we should expect some of the best propane values based on history. Over the past five years, front-month propane has averaged around 74 cents during May and June. April has averaged around 78 cents, so the odds favor putting our plans together over the next couple of weeks and begin executing them in the upcoming couple of months.”
In that article, we went into a lot more detail about the thought process that goes into a hedging program and used Chart 1 to illustrate how that might look.
Chart 1: Hedge Plan Sept.-April 2024-2025
Note in Chart 1 that we were buying in May and June to fill our hedging goals for September through April.
It has been fortuitous for buyers over the past few weeks since that article was written that propane prices have continued to fall. As we write on Thursday evening, May 2, Mont Belvieu ETR propane just closed at 72.625 cents and Conway at 70 cents. These values are all over where May and June have averaged during the past 10 years, so we know we are in a much safer buying zone.
Hedges made two weeks ago would have been paying a premium to the 10-year average propane price for most months. But now, as we look out over the next three years, there are only a handful of months where that would be the case.
In addition, propane has fallen under its 200-day moving price average. History suggests that buying when that is the case greatly increases the chance of the hedge being favorable. Further, propane’s value relative to WTI is at or below the lowest we have seen for this time of year going all the way back to 2001. Generally, buys made when propane is valued low relative to WTI have a greater chance of being good.
We pointed out in recent Trader’s Corners that this downturn in prices has been aided by strong propane production and a drop in crude’s price. Propane inventories are near five-year highs largely due to the surge in production. Production came down just a little during the week ending April 26 after setting new records two weeks in a row. Still, it is a robust rate, and with inventories already high such a high rate could very well lead to propane inventories setting five-year highs in upcoming weeks.
So as good as the past two weeks have been for buyers, there could be more downside for prices, so that is why layering in supply as in the example above is a good idea.
We also shouldn’t underestimate the impact of the sharp fall in crude’s price since April 8 on the favorable prices we now see in propane. Propane’s turn lower exactly corresponds to the decline in crude’s price.
Chart 2: Crude and Propane Closing Prices
Crude has been tumbling on concerns for the global economy and more recently because Hamas and Israel are at least considering terms for a ceasefire again.
A part of the economic concern was an uptick in inflation. It appeared inflation was under control at the start of the year, and for several months the expectations grew that the Federal Reserve would start lowering interest rates in June. Then inflation ticked up, and the Fed took the June rate cut off the table. Subsequently, there was another round of concerning inflation causing speculation that the Fed could raise interest rates even more. That caused more concern for energy demand and became a heavy weight on crude’s price.
At the conclusion of today’s (Thursday, May 2) Federal Reserve monetary policy meeting, Federal Reserve Chairman Jerome Powell was asked if the Fed could raise rates. He suggested strongly that the next rate change is far more likely to be a cut, though he acknowledged that such a cut will come…
Read More: Does threat or opportunity win in your propane-buying plan?