warm thoughts


Written on: March 3, 2022

Ukraine flagWhile March came in like a lamb weather-wise following cold and snowy conditions the previous week across much of the United States, it was the shortage of supply and the start of a war in Ukraine that was causing a surge in propane prices along with many other energy commodities across the globe. Mt. Belvieu exceeded $1.53 a gallon again as March began, a price not seen since early October 2021 when exports were causing concern about volumes ahead of the winter.

As the reality of the Russian invasion of Ukraine set in, Brent crude oil shot up to $113 a barrel on March 2, a high not seen since 2011. The fluid situation in Ukraine has traders concerned about the many scenarios that could play out causing prices to surge higher. Russia produces 17 percent of the world’s natural gas and 12 percent of the world’s crude oil and Ukraine is along the route of pipelines delivering supplies, most notably natural gas, to the European continent as well as other destinations. Supply disruptions due to fighting, sanctions, Russia potentially cutting off supplies to adversaries and buyers possibly cutting off purchases from Russia are all factors that could be supportive of prices. Some analysts believe crude oil could hit $150 a barrel due to the crisis.

Meanwhile, Russia and Saudi Arabia are enjoying the bump in prices as they benefit from bumps in revenue amid higher priced oil. A meeting of OPEC on March 2 took only 13 minutes to decide not to increase the output any more than already planned. OPEC noted price volatility driven by “current geopolitical developments” rather than underlying fundamentals like supply and demand.

Sixty million barrels of crude oil were released from a total of 31 countries including the U.S. Strategic Petroleum Reserve in early March. While this was intended to calm prices, it may have had an opposite effect just like a release from the U.S. SPR failed to calm prices last fall. Often such moves cause fear in the market about what is to come rather than a sense of relief.

For propane, upward pressure on prices was already expected for March as supplies were very likely to hit some lows. Winter was winding down and the effects of a season of often record-breaking exports took their toll. Energy Information Administration (EIA) date released March 2 showed just 37 mmbbls. Year ago levels were 41mmbbls. IHS Markit had expressed concerns weeks earlier U.S. propane inventory could be as low as 32mmbbls at the beginning of March. The lowest stocks going back to 2015 was 33mmbbls. IHS Markit predicted days of disposition could fall to 11 days which could be the bottom for the year and they shows February 2022 peak demand double that of 2014 due to much stronger exports and higher heating demand due to population growth.

Despite expected growth for natural gas and crude oil production, propane volumes for 2022-23 could still be held down by exports. Propane exports from the U.S. were strong leading to the price peak at $1.53 in early October. Slower exports and warm weather for much of the fourth quarter caused a decline in prices to $1.00 for much of December before moving back up to $1.30 in January as degree days in much of the U.S. were at least 10 percent higher than a year earlier. Exports have a strong chance to move up again as traders have noted this year amid a heavier usage of propane to make plastics in Asia. For traders, it has a been a surprise just how much Asian companies are willing to pay for U.S. propane.

International activity is now characterized in the U.S. by 40 billion gallons per year produced with 25% going to the U.S. petrochemical market, 25% to U.S. residential and commercial customers and 50% to exports. Not much more than a decade ago, 4mmbbls per month was the maximum levels that could be exported from the U.S. A lot is being learned about the rapidly changing international market. It is a major concern that 5% annual demand growth of exports has been occurring while production growth has only occurred at a rate of 4% year over year.

Before the curve ball thrown at the energy markets by the Ukraine invasion, the EIA’s February Short-Term Energy Outlook (STEO) noted a wide range of factors affecting the marketplace. The expectation before the invasion was for Brent crude to average $90 per barrel in February and to fall to $87 in 2Q 2002. $75 per barrel was expected for 4Q2022 and an average of $68 was expected for a 2023 average. Crude oil production was expected to be 12mmbbls/day in 2022 and 12.6mmbbls/day in 2023. The record for crude oil production is 12.3mmbbls in 2019.

Natural gas has been a commodity propane is derived from more and more in the past decade. The Henry Hub average for January was $4.38 per million BTU’s, up from a December average of $3.76 per million BTU’s. Henry Hub was expected to average $4.70 million BTU’s amid strong demand for Liquified Natural Gas. Consumption of Natural Gas averaged 105.2 billion cubic feet per day (Bcf/d) in February, down 3% from February. Most of the declines have been in the residential and commercial sectors with the average of 43.8 Bcf/d, down 10% from last February.

Certainly, many factors are at play as we move out of winter 2021-22 and toward the winter of 2022-23.