Why volatility in propane prices can affect names like AmeriGas Partners
Colder-than-normal temperatures caused strong propane demand over this winter heating season and caused propane prices to spike at points.
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APU’s supply contracts typically provide for pricing based on formulas using the current prices established at a major storage point (such as Mont Belvieu, Texas, or Conway, Kansas) or posted prices at the time of delivery.
In Mont Belvieu, propane prices averaged $1.20 a gallon in Q1 or 35% above the prior year. U.S. propane inventories at the end of December were 46 million barrels or 21 million barrels below the same time last year, and 11 million barrels or 19% below the five-year average. Volatility in propane prices continues well into the second quarter (January through March) even as inventories are at historically low levels.
Extreme volatility in propane prices could negatively affect the margins of distributors such as AmeriGas, as the company may not be able to immediately pass on the cost of more expensive propane to its customers. From many reports, this winter season was especially tough to manage, given extreme weather resulting in high demand, spikes in price, and logistical problems getting propane to end customers.
Propane prices affect distributors such as AmeriGas Partners (APU), Suburban Propane (SPH), Ferrellgas (FGP), and NGL Partners (NGL). Note that AmeriGas is part of the Yorkville High Income MLP ETF (YMLP).
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