Natural gas liquids
Propane is a natural gas liquid (or NGL). 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 are both important feedstock for chemical plants. But around 5% of all American homes also use propane as a heating fuel. So it’s important for investors to monitor propane prices.
Propane prices and inventories
The price of propane depends on inventory, which in turn depends on the severity of the winter. Last winter, propane prices spiked. The inventories in certain regions that desperately needed it experienced a propane shortage. This was due to the severe cold and a lack of transportation.
Last week, residential propane prices averaged ~$2.36 per gallon, which was $0.01 per gallon less than the week before and ~$0.47 less than the same time last year.
Propane prices affect propane distributors such as Ferrellgas Partners (FGP), Suburban Propane (SPH), AmeriGas Partners (APU), and NGL Energy Partners (NGL). Most of these companies are components of the Global X MLP ETF (MLPA).
So far this winter, prices are lower and also steadier, close to $2.40 per gallon. This is mainly because of the comfortable inventory position in propane, which the chart below illustrates.
In the week ended January 2, US propane inventories decreased by 1.6 million barrels to 75.7 million barrels. As of this date, propane inventories are 33.2 million barrels greater, or 78.3 % higher, than they were in the corresponding period last year.
Gulf Coast inventories decreased by 1.1 million barrels, Rocky Mountain and West Coast inventories decreased by 0.1 million barrels, and Midwest inventories decreased by 0.4 million barrels.
East Coast inventories increased by 0.1 million barrels.
Outlook for propane demand and prices
The U.S. Energy Information Administration (or EIA) in its December STEO (short-term energy outlook) expects households in the Midwest this year to spend 34% less on propane than last winter. This is a result of prices being 26% lower than last winter.
The EIA expects households in the Northeast to spend 20% less. This is because of prices being 13% lower than last winter.