Natural gas liquids
Propane is a natural gas liquid (or NGLs). NGLs are hydrocarbons—in the same family of molecules as natural gas and crude oil. Other NGLs include ethane, butane, and pentane. Propane and ethane, in particular, are both important feedstocks for chemical plants.
Last winter, propane prices spiked as inventories saw record lows, thanks to severe winter. Prices touched a record high of ~$5 per gallon last winter. See the graph above.
Propane prices affect propane distributors such as Ferrellgas Partners (FGP), Suburban Propane (SPH), AmeriGas (APU), and NGL Partners (NGL). Most of these companies are components of the Global X MLP ETF (MLPA).
U.S. propane stocks increased by 0.2 million barrels to 81.6 million barrels as of October 17. They’re now 23.7 % higher than last year’s levels.
Gulf Coast inventories increased by 0.2 million barrels. East Coast inventories were up by 0.1 million barrels. Midwest inventories decreased by 0.2 million barrels, while Rocky Mountain and West Coast inventories remained unchanged.
Outlook for propane demand
The U.S. Energy Information Administration (or EIA) expects that households in the Midwest will spend 34% less than last winter. This forecast is a result of ~24% lower prices. Also, consumption is 13% lower than last winter.
Households in the Northeast are expected to spend 13% less this winter. This shows that prices are ~5% lower than last year. Consumption is ~9% lower than last year.
Weather: An important game-changer
Farmers depend on propane to remove moisture from their corn harvests. Corn harvesting starts in October and ends in November.
Lower prices are likely to encourage farmers to store propane before the winter starts. This might result in a significant drawdown before the start of winter and make less propane available to meet heating demands.
The amount of propane used up will affect propane prices when winter arrives. Last year, propane prices spiked as a result of a shortage in propane inventories.
So propane prices will depend on two things: how much propane is used up before the peak heating demand season starts and the severity of the approaching winter.
For context, the EIA has forecasted that the coming winter will be warmer than the previous one. Learn more in Why a warmer winter could sap propane demand.