Conway propane continues to decouple from WTI

OREANDA-NEWS. May 20, 2015. Midcontinent propane's value relative to WTI fell to its lowest levels in three years this month, amid prolonged oversupply and weak seasonal demand.

Over the last 12 weeks, the midcontinent propane market transitioned away from the robust winter demand season to its off-season. But the price decline has been steeper this year than in the prior two years, amid a serious supply overhang.

Conway, Kansas, propane tumbled to 28.95pc of WTI by midday today, bringing its two-and-a-half month long plunge relative to the futures contract to a new low. Conway propane's cash price has fallen 16.685?/USG from 56.56?/USG on 26 February, when it was at 49.31pc of WTI, to today's high/low mean of 39.875?/USG.

Conway propane's value relative to WTI is at its lowest since summer 2012, and is on-track to matchor surpass that year's phenomenally low values. The fundamentals of the 2012 market are similar to those the midcontinent market is facing today — save for the dramatic drop in crude prices.

In 2012, US propane stockpiles ended the winter with then-historically high reserves, as inventories started to refill in the third week of March, according to US Energy Information Administration (EIA) data. The 2011/2012 winter was particularly mild, resulting in substantially lower propane demand as a heating fuel across the midcontinent, according to heating degree day data from the National Weather Service. Heading into May of that year, PADD II propane inventories were at 20mn bl, 1.69mn bl more than was reported for the first week of May 2015, and Conway propane's value relative to WTI was teetering at 31pc, not unlike where Conway propane is valued today. Propane's price then further decoupled from WTI, which only dropped slightly that summer, plunging from 83?/USG on 1 May 2012 to a low of 50.68?/USG on 6 July 2012, one day after its value to WTI bottomed out at 24.73pc.

Last week the EIA reported a draw in PADD II propane reserves, the first time regional stocks fell in May since 2010, but this was not taken as an indication of new demand. The unseasonal draw comes amid an uptick in south-bound propane transfers, as players took advantage of the open Conway/Mont Belvieu, Texas, arbitrage combined with end-of-winter tank refilling after a cold week. PADD II inventory draws should be smaller for the week ended 15 May, with fewer reports of north/south transfers on account of a narrower arbitrage.

Given the parallels between this year and 2012's propane inventories and value relative to WTI, this summer could see Conway propane's value drop to levels seen three years ago. In fact, many market participants have told Argus that they expect to see such a price collapse in the midcontinent, albeit a gradual one. The market continues to see close-to record levels of NGL production and stagnant demand, with no new demand-side projects in the midcontinent on the horizon. If the current trend mirrors 2012, Conway propane could remain at sub 40pc of WTI until the mid-fall or winter, when seasonal demand returns to the market.

Spot propane values at the Texas Gulf coast have remained relatively steady and even increased in value relative to WTI today, standing at 33.34pc of crude, up from yesterday's 32.77pc value.