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Natural Gas Liquids - Current Market Conditions January-March 2012

Propane

Propane at the Mont Belvieu, Texas hub traded at US$1.52 per gallon in November, down only slightly from US$1.53 in October. Over the second half of 2011, a disconnect between WTI and propane prices existed with propane prices no longer tracking crude prices movements. This disconnect is largely due to the unique continental supply and demand fundamentals of the propane market and global factors that are impacting the market for crude oil. As of mid-December, futures markets see propane at Mont Belvieu trading at around US$1.32 per gallon for the first quarter of 2012.

The low propane inventory situation in the US that has lingered for most of 2011 is a key factor behind propane’s deviation with crude. US propane inventories have been at the bottom of the five-year range since April. Despite this, mild weather in November and early December resulted in a lower than average withdrawal from storage over that period. By early December, US inventories were reported at 59.7 million barrels – 3.3 million barrels lower than 2010. In Canada, low storage withdrawals of only 320 thousand barrels in November resulted in inventories seven per cent above the five-year average being reported for December. The average November withdrawal is 1.9 million barrels. Canadian inventories were 8.2 million barrels on December 1^st.

On the supply side, propane production in the US from natural gas is growing, supported by increases in liquids-rich shale gas. Due to low natural gas prices, producers have been increasingly targeting “wetter” shale plays, such as those in the Eagle Ford and Marcellus formations. The high prices for liquids are yielding very profitable margins for the extraction of them from the natural gas stream. Furthermore, increasing oil production in the Bakken formation is also yielding high volumes of liquids.

Counteracting the increase in liquids production from natural gas is a decline in production from US refineries in 2011, and high exports of propane from the US Gulf Coast. Waterborne exports of NGL (primarily propane, with smaller volumes of butanes) averaged 3.7 million barrels per month, up 15 per cent from 3.2 million barrels per month in 2010. This growing export trend started in 2009, when exports rose 240 per cent from an average 735,000 barrels per month reported in 2008. Strong demand from Mexico, the Caribbean and South American nations and low imports from Canada have impacted US balances. With propane fetching higher prices in overseas markets, the incentive to export from lower priced markets, such as the US, remains high.

Propane demand for heating in North America strongly picks up in December and January. Current seasonal forecasts from national weather authorities predict a colder than average winter in western Canada, and a warmer than average winter in eastern Canada; and the eastern and southern US. A warmer than average winter in these regions could result in reduced propane demand from residential and commercial sectors.

The petrochemical sector accounts for roughly two-thirds of NGL demand in North America and petrochemical demand remains strong with high utilization rates. While the preference for light feedstocks such as ethane remains high, propane is still favoured for its cost per pounds of ethylene produced. Stocks of propylene (a byproduct of cracking propane) in the US are currently high, which could place downward pressure on propane as a feedstock in the coming months.

Price Pressures

• Price of Crude Oil (uncertain pressure)
  Futures markets at mid-December have WTI prices trading around US$94 per barrel for the first quarter of 2012. Concerns about the US and European economies, and the impact of another recession on oil demand have placed uncertain pressure on oil prices.
• US Propane Balances (uncertain pressure)
  NGL production from natural gas is growing, but refinery production is declining. Higher propane prices in non-US markets have led to increased waterborne exports of propane.
• Inventory Levels (upward pressure)
  Canadian propane inventories are slightly above the 5-year average, but US propane inventories are at the bottom of the 5-year range. Overall, North American inventories are low as of early December.
• North American Demand (downward pressure)
  Seasonal demand is increasing with the arrival of the heating season; however, a warmer than average winter is forecast for much of the US and futures prices for propane are now reflecting this. Cracking of propane by petrochemicals could decline in the coming months as propylene stocks continue to grow and residential demand for propane increases.

For further natural gas liquids pricing data and information, please see our Helpful Links. The following sections are also available: How Canadian Markets Work, Canadian Industry and FAQs.

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Date Modified:

2012-01-04