Oct 21 / Victor Arduin

Propane benchmarks show a strong recovery in October

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"Historically, inventories tend to peak between September and November, as domestic consumption and reduced refinery activity put pressure on stocks."

Propane benchmarks show a strong recovery in October

  • In October, propane prices have appreciated by more than 15% year-over-year and over 19% month-over-month.
  • On the supply side, propane production remains elevated, up 5.13% year-over-year. However, weakened demand in 2024 has significantly increased the availability of propane, leading to stockpiles surpassing the 100-million-barrel mark.
  • Corrections may occur in the coming weeks, especially with the decline in oil prices, which have a significant correlation with propane prices. In this context, the fundamentals of domestic demand in the U.S. and exports will be crucial for providing support.
  • Additionally, weather events have gained relevance in the energy complex and could pose upside risks in the upcoming winter.

Introduction

Among the various fuel options available, propane stands out due to its unique characteristics. As a hydrocarbon gas that produces a clean-burning flame when vaporized, propane's usage has grown in recent years. Obtained from natural gas extraction or petroleum refining, propane can be stored in pressurized tanks as a liquid for transportation and distribution.

Propane is a versatile energy product with numerous applications. It plays a crucial role in various aspects of modern life, from heating homes and cooking to fueling vehicles and powering industrial processes. Its efficiency, portability, and clean-burning properties make propane a popular choice in many industries and households.

With propane nearing its peak in inventories before the beginning of winter, this report will discuss the main fundamentals currently affecting the propane market.

Image 1: US - Daily Average Propane Spot Price (FOB, USG per Gallon)

Source: Refinitiv

Image 2: US - Propane Stocks (Million Barrels per Day)

Source: EIA

US propane stocks are higher than in 2023

While October is demonstrating bullish performance for propane prices, the same cannot be said for September. According to our estimates, LPG exports were around 2.12 million barrels last month, reflecting a 3.96% decrease month-over-month. The main reason for this decline was maintenance at export terminals, particularly in Texas. Since the U.S. produces significantly more than it consumes domestically, exports play a crucial role as a market driver.

Historically, inventories tend to peak between September and November, as domestic consumption and reduced refinery activity put pressure on stocks. Could be more build in propane stocks over the coming weeks, exceeding the already high levels seen in 2023 and bring correction over propane benchmarks.

Other fundamental also raise concerns, particularly as crude oil prices— which have a strong correlation with propane prices—are declining again due to demand worries stemming from China. Additionally, the macroeconomic environment is supporting the U.S. dollar, making energy commodities more expensive for holders of other currencies, which in turn leads to lower demand.

Image 3: US - Propane Exports (Million Barrels per Day)

Source: EIA

Prices will need to rely more on domestic demand and exports

For prices to continue trending upward, propane market fundamentals must offset events in the energy complex. This means that prices will need to increasingly rely on domestic demand and exports, especially as the market remains cautious about oil fundamentals. Concerns are growing over the possibility that Saudi Arabia may ramp up production starting in December, which could reduce the support for propane prices derived from crude oil benchmarks.

There is room for increased demand as winter approaches in the Northern Hemisphere, leading to higher heating needs in the U.S. Additionally, with favorable arbitrage for exports due to high demand in Asia, American propane will continue to find opportunities for exports in the short-term.

Other upward risks may manifest in the market in the next winter season. Climate factors are increasingly affecting commodities market, especially energy assets. Low temperatures could affect oil and gas production as increase demand for heating in US and driving up prices of propane as happed in beginning of 2024.   

Image 4: Mont Belvieu ETR Price Spread Far East (USc)

Source: Bloomberg

Summary

The main propane benchmarks are showing a strong recovery in October, following significant corrections in September due to a decline in exports, which increased the availability of propane in their inventories.

Historically, inventories tend to reach their peak between September and November, with room for further accumulation that could exert some bearish pressure on propane.

In a scenario of high production and bearish fundamentals in the energy complex, domestic demand and exports will play an important role in maintaining the current appreciation of propane benchmarks.

Other bullish risks may manifest in the market, particularly those related to weather. At the beginning of 2024, low temperatures significantly increased heating demand in the U.S., leading to a strong appreciation of propane, and a similar situation could occur this winter.

Weekly Report — Energy

Written by Victor Arduin
victor.arduin@hedgepointglobal.com
Reviewed by Ignacio Espindola
ignacio.espindola@hedgepointglobal.com
www.hedgepointglobal.com

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