Viewpoint: Canadian propane under pressure

OREANDA-NEWS. July 20, 2015. Canadian propane marketers faced a gauntlet of oversupply, thin demand, and insufficient takeaway options during the first half of 2015, which drove prices to record lows.

But expanded export capacity on the US west coast and in Alberta could whittle away inventories in the second half of the year.

Canadian propane stocks have reached record levels this year, according to the Canadian National Energy Board (NEB). June inventories stand at 8.6mn bl, 2mn bl more than in June 2014 and 600,000 bl over levels in June 2012, the last time propane markets faced severe oversupply. Western Canadian inventories are up by 1.09mn bl from last year at 4.8mn bl, and eastern Canadian reserves are 924,000 bl greater than in 2014, at 3.7mn bl.

The oversupply stems partly from the reversal of Kinder Morgan's Cochin pipeline last summer, which eliminated the primary pipeline export route for propane, and the saturation of the US market by US domestic production, which pushed Canadian product from the midcontinent.

As supplies rose and the seasons changed, Edmonton, Alberta, propane prices deteriorated rapidly, falling from its 2015 peak on 2 March at 26.875?/USG to 1?/USG on 22 May, before nosediving into negative values.

The negative price phenomenon is possible because Edmonton propane is priced at a differential to the US midcontinent market at Conway, Kansas. As demand dried up for Conway propane and that price tumbled, Edmonton propane was exposed to the basis risk and dropped as well. In 2014, basis risk drove Edmonton propane prices to new heights as midcontinent propane values soared amid cold weather demand and supply bottlenecks created a perfect storm.

Negative pricing relative to Conway curbed spot liquidity in the western Canadian market. Participants confirmed receiving propane shipments invoiced at 0?/USG. In some cases, freight was even discounted.

Despite the grim outlook, the NEB's most recent storage report gave an early indication that the oversupply might be on the verge of ending. NEB data showed that Alberta's reserves fell by 6,660 bl in June, after only rising by roughly 4,000 bl in May, when the stocks had risen by 778,000 bl and 1.16mn bl in May and June of 2014, respectively.

The change in western Canadian propane monthly storage figures comes amid an uptick in export demand from the terminal in Ferndale, Washington, where five VLGCs loaded propane/butane mixed cargoes since May. The propane is sourced from Alberta, while the butane is often shipped in from the Bakken shale.

As US west coast exports begin to chip away at storage volumes, Keyera is expected to bring its 40,000 b/d NGL rail terminal near Fort Saskatchewan, Alberta, online in July. My mid-July railcars are already en route to be loaded.

Market observers remain skeptical that the supply overhang is clearing. Few expect substantial price change before the winter demand season kicks in.