warm thoughts

AVERAGE MOTOR GAS DROPS BELOW $4, WHAT’S IN STORE FOR PROPANE?

Written on: August 11, 2022

Average motor gas prices dropped to $3.99 a gallon on Thursday, August 11, after having been over $5 a gallon in mid-June. Demand for oil worldwide is down amid concerns about the global economy. Brent crude, the global benchmark, was below $100 a barrel Thursday, down from $120 in June. While prices are likely to fall in the short-term, what happens to various commodities including propane as winter plays out is, as always, never clear.

Oil prices will follow demand. There was a lot of demand destruction this summer as fallout from the Russian invasion of Ukraine continues to take shape. Trips and errands have been cut here and there and it adds up, but whether demand and travel activity pick up again remains to be seen. Concern about the economy in the U.S. and worldwide will also affect demand. While gas prices are down, other commodities such as food and electricity remain strong. There has been an increase in oil production as a result of higher prices and oil has been released from strategic reserves. But OPEC has not been quick to bump production up too high amid concerns about demand levels.

Weather is always a huge factor just from a standpoint of degree-days and how much demand will be created. Also, hurricanes can knock out refineries which can have an immediate effect shooting prices higher. And the Russia-Ukraine war is a huge factor. While Russia has cut the natural gas supplied to Europe through the Nord Stream 1 pipeline to 20% of capacity, there remains uncertainty about how the next several months play out as Russia responds to continued sanctions from the West. It is not certain how much countries that have relied on Russia for years for oil and gas will scale back their dependence as colder temperatures arrive.

For propane, inventory data shows stocks at 65.7mmbbls, up from 63.6mmbbls a week earlier. The stocks are now close to 65.3mmbbls, the level at this time last year. Last year, propane prices fell in the early months of winter as temperatures were mild. Of course, a cold start to the season could bring the opposite result for prices. A variety of bullish factors last year had prices higher going in the months leading up to the winter season and the decline was significant. With prices just over a dollar a gallon, propane marketers are often in a predicament where many factors can moves prices in either direction. On the one hand, prices for propane in relation to other commodities are low but prices are high compared to the mid-summer averages in the 70 cpg area during the past ten years.

As always, it is important to have access to supply and be ready for all scenarios. Sure, prices can decline with mild temperatures, but it is best to be hedged and prepared for a colder scenario. As the season approaches and then progresses, it is important to pay attention to the needs of your customers and all factors playing out in the marketplace. Suppliers are no longer just focused on the U.S. and if they find they can make more money shipping propane abroad, that is where it will go. Watch the forecasts, have multiple supply points, and consider what terminals make the most sense based on the time of year and level of demand. Falling motor gas prices are good news, but don’t take your eye off the ball for planning for the entire winter season and all scenarios that can play out.

Blue Peak Resources