The Upper Midwest is facing a tight market for propane this winter, as evidenced by a 1.5-million-barrel inventory draw in the region for the week ending last Friday, January 10.
At the beginning of November, the corn harvest in the Upper Midwest (Minnesota, Iowa, Wisconsin, Nebraska) pulled large quantities of propane from distribution terminals for corn drying. Between late-November and December, supply disruptions prevented these terminals from replenishing their supplies of propane.
With the onset of severely cold weather this past week, propane supplies are extremely tight, forcing emergency measures to ensure supply and increasing the Midwest spot price of propane at Conway, Kansas compared with the spot price on the Gulf Coast at Mont Belvieu, Texas. Propane prices in the Midwest will likely need to rise to keep propane in the region rather than flowing south to the Gulf Coast.
In October, EIA noted the effects of increased production of domestic oil and gas on propane flows between the Midwest and the Gulf Coast. Infrastructure changes have allowed the growing supplies of propane and other hydrocarbon gas liquids (HGL) from increased production to flow south from and through the Midwest to supply Gulf Coast petrochemical demand and also to gain access to the global market. Recently, the onset of severely cold weather in the Midwest has increased regional demand for propane and other heating fuels.
Even before the recent cold snap, Midwest propane markets were relatively tight compared with those on the Gulf Coast for other weather-related reasons. In addition to space heating needs, the Midwest uses propane for agricultural applications such as corn drying. For corn to be stored, it first needs to be dried, using large-scale heaters that often use propane for fuel. A late-2013 corn harvest, along with cold wet weather, resulted in strong demand for propane at distribution terminals in the Upper Midwest.
For the week ending November 1, Midwest propane inventories dropped more than 2 million barrels, the largest single-week stock draw in November since 1993. This demand prompted a strong price response, and propane at Conway moved to a 3-cent-per-gallon (/gal) premium over Mont Belvieu during the first week of November, the first such premium in almost three years.
After the harvest, logistical problems prevented the region from fully replenishing inventories before the onset of winter. The Upper Midwest is supplied with propane by pipelines (Mid-American and ONEOK) flowing north from Conway (home to 30% of the nation’s propane storage), the Cochin pipeline coming south from Canada, and from rail deliveries (Figure 1). The Cochin pipeline, which delivers HGL from Canada to the Upper Midwest, was out of service for maintenance from late November to December 20 and unavailable to deliver supplies. Rail transportation disruptions, both due to weather and other factors, prevented deliveries from Mont Belvieu and Conway, as well as from Canada.
Since early 2010, propane prices at Mont Belvieu, the nation’s largest propane storage and market hub, were higher than at Conway by as much as 30 cents/gal, prompting propane supplies to flow south on newly expanded southbound pipelines. A large local petrochemical demand and access to the global propane market via expanded HGL export capacity supported Mont Belvieu prices and encouraged propane from the Rockies (PADD 4) and elsewhere in the Midwest to flow south.
Low temperatures and winter storms closely followed the corn harvest, and logistical problems continued. The colder weather increased residential space heating demand at a time when markets were already tight. As demand outpaced supply, inventories dropped further, by 1.5 million barrels and 1.2 million barrels for the weeks ending December 6 and January 3, respectively. By January 3 (Figure 2), prices had vaulted to a 21-cent/gal premium to Mont Belvieu.
Strong back-to-back demand surges, low inventories, and supply challenges forced emergency measures to ensure residential adequacy of propane. Several Midwestern states responded by suspending limitations on hours of service for propane delivery truck drivers. Trade press reported long waiting lines at propane distribution terminals in the Upper Midwest, as well as supply of propane by truck from as far away as Oklahoma. Since the week ending October 11, Midwest propane inventory levels have dropped by 12.8 million barrels, compared with a drop of 7.3 million barrels for the same period’s five-year average.
Because global prices for propane are significantly higher than U.S. prices, propane supplies will continue to move to Mont Belvieu for export. Midwest propane prices will rise to keep marginal supplies in the region when they are needed.
The Midwest will also need to prepare for the coming reversal of Kinder Morgan’s Cochin Pipeline, which delivers HGL from Canada to the upper Midwest. Kinder Morgan plans to reverse the flow to deliver light condensate to Canada. This reversal will change supply dynamics in the Midwest.
However, this situation may also improve the economic prospects for infrastructure projects to process and transport HGL from the Bakken formation in North Dakota and Montana to Midwest markets farther east.