Impact of weather on propane demand
The demand for propane for home heating purposes is directly affected by the severity of the winter weather. Warmer-than-normal temperatures in the winter season—October to March—generally result in reduced propane usage. Conversely, colder-than-normal temperatures would lead to the increased use of propane.
According to forecasts by NOAA (National Oceanic and Atmospheric Administration), the upcoming 2017–2018 winter is expected to be colder than last year’s mild winter.
As the chart above shows, the forecast HDDs (heating degree days) for October 2017–March 2018 are higher, except for December—which is nearly the same as last year.
Also, the HDDs are expected to be nearly equal to the ten-year average level. This should bode well for the propane MLPs that we’re discussing—AmeriGas Partners (APU), Ferrellgas Partners (FGP), Star Gas Partners (SGU), and Suburban Propane Partners (SPH).
The demand for propane also varies regionally. Propane demand from the petrochemical industry is greater in the Gulf Coast region due to the high concentration of petrochemical plants in the region. Residential demand for propane is high in the Midwest and Northeast regions. The use of propane in agriculture is more concentrated in the Midwest.
Seasonal variation in demand impacts propane inventory levels as well as prices. The distance from supply sources to end users also impacts prices. In addition to supply–demand dynamics, crude oil and natural gas prices influence propane prices because propane competes with them as a source of energy.
In the next part, we’ll see how seasonal variation in demand impacts the earnings of propane MLPs.