Why weather plays such an important role in propane demand
The correlation between weather and propane demand
Weather conditions have a significant impact on demand for propane, as the volume of propane used is affected by the severity of the winter weather, which may vary substantially from year to year. Warmer-than-normal temperatures will result in reduced propane usage, while colder-than-normal temperatures will result in greater usage.
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Heating degree days as temperature indicators
Heating degree days measure the difference between the outside temperature and room temperature to help calculate the demand for energy needed to heat a given area. Greater heating degree days represent colder weather, while lesser heating degree days represent milder weather.
This winter’s weather has been far colder than last year, and colder than normal. The below graph shows weekly heating degree days for this winter compared to a normal winter.
For the winter heating season to date (beginning in October), cumulative heating degree days have totaled 4,097 compared to a historical average of 3,862, making for a colder-than-normal winter. This is a positive for propane demand.
In its recently released 1Q14 results, AmeriGas Partners (APU) noted that the weather was 3.8% colder than normal. This resulted in retail volumes being up 23 million gallons for the three months ended December 31, 2013, or 7% higher due to weather that was 14% colder than the prior year.
Weather fluctuations are a notable data point for holders of propane distributers, such as APU, Suburban Propane Partners (SPH), Ferrellgas Partners (FGP), and NGL Energy Partners (NGL). Colder weather is positive for the margins of these companies. Note that APU comprises a portion of the Yorkville High Income MLP ETF (YMLP).
Continue to the next part of this series to find out about one more crucial factor affecting propane demand.