US Northeast propane sellers feel the impact of high stocks
By Zahid Afzal and Benjamin Morse
July 10, 2015 - Growing US Northeast propane production, combined with slowed summer demand and increased regional stocks, have sellers in the region facing stiff competition from US Gulf and Canadian producers looking for outlets for their spot barrels.
Weak fundamentals have also pushed Canadian and Northeast propane prices close to break-even levels. Each of those regions price propane off the US Gulf price, which has lately been hovering in the high 30 cents/gal from the 40 cents/gal high in mid-May. With transportation costs at roughly 30 cents/gal by rail, the economics of propane production have become a challenge.
Propane production from natural gas plants in the Northeast averaged 104,000 b/d in the first quarter of this year, up 54% from the first quarter of 2014, according to the US Energy Information Administration. The data only includes production from West Virginia, Pennsylvania and New York, the main Marcellus Shale producing region.
Analysis continues below...
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By adding barrels from the Utica Shale, which is mainly in Ohio, production is closer to 171,000 b/d, according to analysts at Platts unit Bentek. Production should increase to an average 193,000 b/d over the summer (April through October), while annual propane demand in the Northeast from the residential and commercial sector averaged about 160,000 b/d on a weather normalized basis, Bentek said.
While this leaves 33,000 b/d of excess supply when demand is high in winter, demand in the summer falls to 107,000 b/d, leaving the Northeast potentially 86,000 b/d long, Bentek said.
HISTORIC HIGH STOCK
The options for sellers in the Northeast are to send the excess to the main demand center in the US Gulf by rail, export it via the East Coast or put it in storage.
But the export option will not alleviate the supply glut due to pipeline capacity constraint in near term. Sunoco Logistics LPG export terminal at Marcus Hook, Pennsylvania, near Philadelphia, has a capacity of about 57,000 b/d. But the Mariner East 1 pipeline, which takes propane from western Pennsylvania, to the terminal currently operates at 20,000 b/d and depends on available ships and demand, mainly from Northwest Europe.
Since transportation costs to the US Gulf are about 30 cents/gal from the Northeast by rail and US Gulf spot prices have been in the high 30 cents/gal range, sellers would have thin margins shipping their excess out of the region and would be better off putting the propane into storage to wait for typically higher winter prices.
See chart: US Gulf Coast non-LST propane since Jan. 2015
While that may have worked in the past, this year is shaping up to be different as stocks grow and could reach capacity before the end of the injection season.
US stocks of propane/propylene, the majority of which is propane, reached 85.7 million barrels the week ending July 3, reaching a historic high, EIA data showed Wednesday.
See chart: US propane/propylene stocks since Jan. 2013
If the stocks continue to build at the June average rate, US stocks could add another 26 million barrels this year, considering there are at least 16 weeks remaining in the injection season, which normally ends around mid-October. That would put US stocks at around 110 million barrels by the end of the injection season and would test storage capacity limits.
Next: Rising imports from Canada add to producers' concerns