Sep 29 / Victor Arduin

Energy Weekly Report - 2023 09 29

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"Until mid-October of 2023, the United States currently holds a supply that can sustain demand for 123.7 days, well surpassing the five-year average. In addition to the large volume of propane exports, few things, if any, have increased domestic demand for this hydrocarbon."

U.S. propane market: what to watch in the end of 2023

  • In addition to the demand having little incentive in the United States, the current supply of propane has exceeded its volume, generating an excess in the market.
  • Crude oil prices have been more supportive of propane prices than propane fundamentals, due to OPEC+ measures and a recent rally in oil prices.
  • Rising interest rates and a potential recession could dampen demand for energy and commodities, including propane.


Since the 2000s, natural gas production in the United States has increased significantly, leading to a substantial increase in propane production from this source. As a result, propane derived from natural gas production surpasses petroleum by a margin of seven times.

This surplus in U.S. propane production has enabled the country to become a net exporter of the product since 2010, with key export markets including Japan, China, South Korea, and Mexico. Asia-Pacific has been a primary market for U.S. propane, given its significant production of propylene, a chemical utilized in the manufacturing of polypropylene.

Therefore, high manufacturing activity leads to higher demand for polypropylene, which in turn drives up demand for propane, as propane is a key feedstock for polypropylene production. On the other hand, most of the propane consumed in the United States is as a winter heating fuel, with weather in the country playing a significant role.

However, like other energy sources, such as oil or natural gas, propane is still a commodity subject to numerous price-changing factors. While some of these factors have recently supported a rally in the market, they may not continue to do so the rest of the year.

Image 1: U.S. Days of Supply of Propane/Propylene

Source: EIA

What is driving the market in 2023?

Last year was very bullish for propane, as it benefited from high energy costs caused by the Russian invasion of Ukraine. Propane is a product of crude oil refining and natural gas processing, so its price is linked to the prices of those energy sources.

However, this year, competition from discounted Russian and Iranian products due to sanctions, as well as the high interest rates observed in the main economies of the world in the first half of the year, have made the propane market quite bearish. In addition, mild weather conditions also have not put significant pressure on the propane market, resulting in record-high inventories, as shown in Chart #2.

Image 2: U.S. Days of Supply of Propane/Propylene

Source: EIA

Until mid-October of 2023, the United States currently holds a supply that can sustain demand for 123.7 days, well surpassing the five-year average. In addition to the large volume of propane exports, few things, if any, have increased domestic demand for this hydrocarbon.

Crude fundamentals have been a lot more supportive of its prices than fundamentals are for propane. The recent rally in oil prices since July, driven by OPEC+ measures, has had a direct impact on the evaluation of propane at major U.S. hubs such as Mont Belvieu and Conway.

Nevertheless, the combined factors of a potential interest rate hike by the Fed in November and a hotter-than-expected winter could potentially trigger a bearish trend for the propane market.

Image 3: Relationship between Crude Oil (USD/bbl) and US Propane FOB Prices (USc/gal)

Source: EIA

The restrictive interest rate scenario persists

Concerns about inflation and interest rate trajectory in the United States have grown. Federal Reserve Chairman Jerome Powell announced that interest rates are expected to remain higher for a longer period than desired. In this context, two scenarios may unfold: a new interest rate hike in November, leading to an extended period of higher rates, or a recession in the country due to the adverse impact of high borrowing costs on the economy.

In both scenarios, commodities, especially oil, are expected to face challenges in appreciating. As shown in Chart #4, the US 2-year yield is still rising, which could potentially impact the demand for energy in the upcoming months, much like it did in the first semester of this year. A decrease in crude oil prices likely exert downward pressure, leading to a bearish trend in propane prices.

Image 4: Crude Oil Benchmark Prices vs. 2-Year Treasury Yields

Source: Refinitiv

In Summary

Much of the propane used in the United States is intended for heating homes. However, the effect of El Niño is expected to bring a milder winter to the country, which is likely to exert minimal pressure on the already high inventories and provide little support for the commodity.

On the other hand, crude oil, which has appreciated significantly since July and is the main driver of propane prices, is likely to face challenges if new interest rate hikes occur or, even, if a recession in the world's largest economy is observed.

Amid a bearish outlook, the significant highlight has been the record-breaking exports. Despite facing competition from Russian and Iranian oil, which is heavily discounted due to economic sanctions imposed on these countries, American propane has increased its presence in key markets, particularly in Asia, where there is a high demand for polypropylene.

Weekly Report — Energy

Written by Victor Arduin
Reviewed by Natália Gandolphi


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