Spot propane prices at the Conway supply hub in Kansas are hovering on either side of $1 per gallon so far in June, the lowest they have been since September 2013, and well below the $4.95 per gallon all-time high registered in late January. The fact they are 20 cents higher than a year ago might have some would-be buyers waiting on the sidelines for a further decline.
However, attacks on major Iraqi cities in recent days mean an expected decline from current values might be a few weeks away. In fact, spot propane prices are set to increase amid an upside breakout by New York Mercantile Exchange crude oil futures. NYMEX crude futures spiked more than $2 per barrel on Thursday to a $106.53 per barrel nine-month high on the spot continuation chart on news Islamists have taken control of two important cities in Iraq and were advancing on Baghdad, threatening to choke off the country’s oil exports.
The widening civil war in Iraq has quickly changed the geopolitical risk premium in oil prices, with increasing production from the OPEC member earlier in the year capping the upside in global oil costs. Iraq production at 3.1 million barrels per day (bpd) was seen climbing to 4.0 million bpd. Now, however, Islamists have taken control of large swathes of the country’s oil infrastructure and could threaten key ports for exporting oil in southern Iraq.
These events create huge uncertainty for the near-term direction for crude prices, with the NYMEX crude contract having sway over spot propane values. Further deterioration in Iraq would push crude prices even higher, targeting the 2013 high of $112.24 per barrel reached in August. Should Iraq slow the attack, we could see the crude contract leak lower, likely pressuring propane prices.
Just this week the Minnesota Corn Growers renewed its concern of potential propane shortages this fall and urged growers to top their tanks this summer.
One urgent reason is the critical Cochin pipeline — which stretches from Alberta to Ontario in Canada and North Dakota, Minnesota, Iowa, Illinois, Indiana, Ohio and the corner of Michigan in the U.S. — is being converted from propane shipments to Canadian tar sands oil in July. It had supplied 36% of Minnesota’s propane, but rail cars will now have to make up the difference. That could require an additional 4,000 railcar shipments after the Cochin pipeline switch, Minnesota Corn said. It has asked the Minnesota Public Utilities Commission to temporarily waive its rules and speed permits for large propane storage units which could ease supply bottlenecks next fall and winter.
Historically, early summer is the time for buyers to secure the best price for purchasing propane, with demand for the fuel highest during the winter months. The buying season has frequently run through mid-August. However, watch your buying window, which will likely be shorter this summer than in years past.
Domestic propane production is averaging nearly 16% higher than a year ago, suggesting prices should decline. However, propane exports are up more than 40%, finding a new home for the extra barrels, with exports ramping up sharply in the third quarter 2013 following new export capacity along the Houston Ship Channel to move the supply overseas.
The export trend has legs, and there is more capacity expected to move into service over the coming months. Combined with a resurgent U.S. petrochemical industry, increasing propane production has ready markets to absorb the off take.
So, if you’re sitting on tank bottoms, pay close attention to the market over the next few weeks because propane prices might very well be plumbing their 2014 lows.