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Why Propane Prices Gained despite Inventory Builds

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Propane inventories

In its Weekly Petroleum Status Report released on November 18, 2015, the EIA (U.S. Energy Information Administration) stated that US propane inventories rose by 0.5 million barrels for the week ended November 13, and that inventory levels were well above the upper limit of the average range. Also, total propane inventories were 104.5 MMbbls (million barrels) for the week ended November 13, 2015. These levels are 23.3 MMbbls greater, or 28.7% higher than they were in the corresponding period last year.

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Propane demand

US residential propane demand is 0.96 MMbpd (million barrels per day) for the week ended November 13, 2015. This was 0.11 MMbpd more than the demand for the week ended November 2, 2015, and 0.38 MMbpd or 27.8% lower than the propane demand in the corresponding period last year.

Propane prices

US residential propane prices were $1.93 per gallon for the week ended November 13, or $0.02 per gallon higher than prices for the week ended November 6. On the other hand, the prices were $0.47 per gallon lower than in the corresponding period last year. This was a 19.3% fall.

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What does this mean?

From the above data, we can observe that propane demand fell by 27.8% while prices fell by 19.3% compared to the corresponding period last year, so demand and prices are highly correlated. Last week’s propane prices rose due to more demand.

Propane stocks are well above the five-year average range and continued to rise in the last week due to a rise in production levels from increased refinery inputs. Refineries operated at almost 90% operable capacity due to high crack spreads. Crack spreads fluctuated at $14 to $15 per barrel last week. This led to heavy production and caused inventory builds of refined products. On the other hand, as the winter approaches, the market expects demand to rise though propane demand is far less than the previous year’s demand.

What is the impact?

A rise in propane demand and prices would be a positive sign for propane producers and distributors. This would raise the revenues of companies such as AmeriGas (APU), NGL Energy (NGL), DCP Midstream (DPM), Enterprise Products (EPD), Ferrellgas (FGP), Targa Resources (NGLS), and Suburban Propane (SPH).

Some of the above companies are components of the ALPS International Sector Dividend Dogs ETF (IDOG) and the First Trust North American Energy Infrastructure ETF (EMLP).

In the next part of the series, you’ll find more updates on how distillate demand favored heating oil prices.

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