OREANDA-NEWS. The spread between Conway, Kansas, and Mont Belvieu, Texas, propane collapsed this week amid news of a larger-than-expected build in inventories last week.

The Conway/Mont Belvieu spread has fallen from an open arbitrage at 6-8?/USG early last week to 3-4?/USG today, with the midcontinent market discounted to those on the Gulf coast.

As the spread narrowed, spot market trading interest quickly dried up, but activity has re-emerged this week despite limited arbitrage opportunities.

The Conway/Mont Belvieu spread should be at least 6? to cover the pipeline transportation costs. But participants may be attempting to arbitrage storage space and fees, choosing to take a small loss on the spread trade only to gain it back in the long-term by paying lower storage costs, market sources have told Argus.

Storage at Conway costs roughly 4?/USG more annually than at Mont Belvieu, a premium which can quickly add up if the barrels aren't expected to move until fall.

Trading has focused on Conway/EPC spreads, even though declines in EPC propane's price have outpaced those at the LST terminal in recent sessions.

Inter-terminal location spreads at Mont Belvieu have seen an uptick in recent sessions with EPC propane falling to a sharp discount. Market sources said they have heard that recent activity is likely being driven by storage constraints at the Enterprise storage hub, but issues could not be confirmed.

Storage constraints are typically imposed to prevent brine contamination, especially during times of heavy rain.

An uptick in inter-terminal spreads typically points to storage constraints at one or more of the terminals. Late last summer, buyers and sellers flooded the location spread market after the LST and EPC terminals put out notices to their storage holders instructing them to keep storage levels at or below contracted levels.

EPC propane's discount to LST propane widened out to 2? in intraday trade today, 0.75? wider than where it started the session.

The discount between the terminals have been steadily widening since the beginning of the month as propane stockpiles at the US Gulf coast continue to grow. EPC propane stood at a 0.25? discount to LST propane on 1 May.

EPC propane has also moved to a discount to the Targa propane market, standing at a 0.375? discount today.

US propane inventories rose by a larger than expected 2.538mn bl to 71.042mn bl for the week that ended 15 May, according to the EIA.