Natural gas liquids
Propane is a natural gas liquid, or NGL. NGLs are hydrocarbons. They’re in the same family of molecules as natural gas and crude oil. Other NGLs include ethane, butane, and pentane. In particular, propane and ethane are both important feedstock for chemical plants. However, around 5% of all US 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. In turn, it depends on the severity of the winter. Last winter, propane prices spiked as inventories in certain regions that desperately needed it experienced a propane shortage due to severe cold and a lack of transportation.
Last week, residential propane prices averaged ~$2.36 per gallon. This was ~$0.01 per gallon lower than the week before. It’s ~$1.28 per gallon less than the price in the same period last year.
Propane prices affect propane distributors like Ferrellgas Partners (FGP), Suburban Propane (SPH), AmeriGas (APU), and NGL Partners (NGL). Most of these companies are part of the First Trust North American Energy Infrastructure Fund (EMLP). They account for ~3.5% of the ETF. Only NGL however, is part of the Alerian MLP ETF (AMLP)—an ETF that consists of the top 25 US MLPs (master limited partnerships).
So far this winter, prices are lower and also steadier. They’re closer to ~$2.40 per gallon. This is mainly because of the comfortable inventory position in propane. You can see this in the above chart.
In the week ending February 13, US propane inventories decreased by 3.5 million barrels, or MMbbls, to 61.5 MMbbls. As of this date, propane inventories were 34.8 MMbbls greater, or ~130% higher, than they were in the same period last year.
Gulf Coast inventories decreased by 2.1 MMbbls. East Coast inventories decreased by 0.3 MMbbls. Rocky Mountain, or West Coast, inventories and Midwest inventories decreased by 0.1 MMbbls and one MMbbls, respectively.
Outlook for propane demand and prices
In its February STEO (Short-Term Energy Outlook), the EIA (U.S. Energy Information Administration) expects households in the Midwest will spend 35% less on propane this winter—compared to last winter. This is a result of prices being 27% lower than last winter.
The EIA expects households in the Northeast will spend 23% less because prices are 17% lower than they were last winter.