Analysis: Short Conway storage may open USGC arb

OREANDA-NEWS. April 15, 2015. A potential US midcontinent propane storage shortage and a widening Conway/Mont Belvieu arbitrage has made fungible pipeline capacity between the two hubs more attractive.

If the Conway/Mont Belvieu discount continues to widen from the current 5.375-6?/USG, a viable market arbitrage between the two hubs may open. Transportation costs between the two hubs is roughly 3.5-6?/USG via pipeline.

Those with pipeline access would stand to benefit, while those without it could be stranded in the oversupplied midcontinent market.

Several recent we propane trades for wet delivery priced at discounts to any-month barrels at the Conway hub, in Kansas, have raised concerns about midcontinent storage constraints.

The wet/any delivery price differential for Conway propane has dipped from its usual premium to a discount to current-month any deliveries twice since the start of April. At the start of the month wet deliveries were heard at a 0.75? discount, but no trades were done. That spread recovered to a 0.5? premium on 7-8 April, before falling to a 0.25? discount on 10 April.

The recent tradesreveal an attempt to avoid over-storage changes, participants told Argus. Although possibly an isolated event, the trade has sparked concern for midcontinent oversupply for the rest of the year.

With spring in full swing, Conway propane demand is entering the off-season. Midcontinent propane is mostly sold into storage during the spring and summer months in preparation for crop drying season in the fall and heating season in the winter. But with little new demand on the horizon, and PADD II inventories at a three-year high of 15.9mn bl, outlooks are beginning to chill.

Gulf coast traders are discussing future supply shortfalls in PADD III. A recent expansion at Enterprise Products Partners' export terminal at the Houston Ship Channel has bolstered exports and assisted in drawing down regional inventories by 446,000 bl for the week ended 3 April, according to Energy Information Administration (EIA) data.

A series of facility expansions and new constructions on the Gulf coast may cause a divergence between the midcontinent and Gulf coast pricing. New projects in PADD III include an Enterprise LPG terminal expansion in the fourth quarter, as well as Dow's Freeport, Texas, propane dehydrogenation (PDH) unit in the second half of the year.

Conway and Mont Belvieu propane price divergence is already noticeable. Conway propane has traded at a discount to LST propane since the end of crop drying season in December and has failed to regain parity since, despite strong winter heating demand from December through mid-March. During that 15-week period, 12.6mn bl were drawn from PADD II storage, while only 6.3mn bl were drawn from PADD III, according to the EIA.

Since 16 March, Conway propane's value relative to WTI has fallen from 45.6pc to 37.8-38.8pc, never breaking above 40pc in April. In the same time period, LST propane's price has tumbled from 49.4pc of WTI to 41.5-44pc in April. The spread between the two hubs, in terms of price relative to WTI, mostly oscillated between 2.4pt and 4.7pt since WTI futures first bottomed out in late January.

The main pipelines running between the two hubs are operated by Enterprise, DCP Midstream and Oneok. There is also a rail facility owned by Keyera connecting Conway to Mont Belvieu, but the rail arbitrage is much wider, estimated at 14?/USG for transport.