Propane Supply in Place to Cover High Fall Demand
November 12th, 2019
Crude oil and refined fuels product prices closed lower yesterday after being down more in early trading. Price were down on negative data from China and President Trump saying that he had not agreed to reduce tariffs as part of the phase 1 deal. Price pared their losses after Genscape, a private vendor reported that crude oil inventories at Cushing, Oklahoma, where WTI crude oil is priced fell by 1.2 million barrels for the week ending November 8th. Cushing crude oil stock have risen the past 5 weeks, but analysts expect that to switch after the closure of the 590,000 bpd Keystone Pipeline, a key path for oil from Canada to the US Midwest.
The China Association of Automobile Manufactures (CAAM) reported yesterday that auto sales fell by 4% in October 2019 versus October 2018. Car sales in China fell for the 16th consecutive month in October. The drop in auto sales in October followed a decline of 5.2% in September and a 6.9% decline in August. Car sales in 2018 in China contracted for the 1st time since 1990’s.
This is not a propane shortage issue, according the National Propane Gas Association (NPGA) Instead, the challenge is getting propane to the right place at the right time. NPGA says the supply issues are caused by limits on the safe transportation of propane from supply points, as well as limits on pipeline capacity.
The current propane situation in the Midwest is not fun for anyone but shifting dynamics of this industry over the last several years has put us where we are today and all of us share some of that responsibility. This is not a new situation and propane supplies are not tight. We are currently struggling with a logistical problem; the propane is not in abundant supply where it is needed, and pipelines cannot ship it fast enough to replace what is being pull out all along the pipeline at truck racks.
How did we get in this situation? Increased production in the Marcellus and Utica shale basin during the shale boom sent excess propane by train to Conway to be stored. This helped drive prices down to very low levels forcing producers to make changes and adapt. One of the first changes was the reversal of the Cochin line which used to bring excess propane into the Midwest from Canada. After the reversal it now takes diluents up to Canada to help in their heavy crude oil production. The next step was that the lines that moved propane from the Gulf to Conway when demand was heavy were not being used effectively and they reversed those lines ship other products like ethane to the Gulf.
Other pipelines were developed in the Marcellus and Utica shale regions to take products from those area to the east at Marcus Hook, Pennsylvania where it can be exported to the global market. All of this has left the Midwest to be supplied mainly from the refineries in the area. These refineries make propane year-round but only have so much storage, so once it got full the rest of the propane was sent south to the Gulf where the demand for exports has been building over the last several years.
Now we get the perfect storm of a delayed harvest due to a wet spring creating crop drying demand across a large geography, wet crops which need more propane to dry them, and colder than normal temperature also creating demand on propane all at the same time. All these factors have helped to put us in our current pinch.
This situation will continue to evolve, and the markets will adapt. It is very likely that the market is in for several more weeks of the current crunch. Storage has the potential to be at a premium going forward if other things do not change. The best practices are to get full early and get on keep full status to try and avoid any issues.