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Winter Outlook 2012-13

Key Findings

  • Propane prices have “de-linked” from oil since mid-2012; however, the liquids extraction from natural gas remains economic for now, contributing to ample supply.
  • High storage, declining crude oil prices, and low crop drying demand for propane combine to place significant downward pressure on propane prices heading into winter.
  • Exports of U.S. propane remain high, largely due to low North American propane prices and higher prices in markets such as Europe, the Caribbean and Latin America.
  • Propane prices at major hubs will be considerably lower this winter relative to prices witnessed last winter.

Historically, propane prices have tracked crude oil prices as propane is the main fuel alternative to heating oil in markets where residential and commercial customers lack natural gas distribution. However, recent changes in propane supply and demand dynamics have resulted in a de-linking of propane prices from their crude counterpart. The result is the price of propane in North America declining from highs reached in mid-2011 while West Texas Intermediate (WTI) crude prices have continued moving between US$85 and US$105 per barrel since mid-2011.

The propane-to-crude price ratio, a measure of propane’s strength relative to crude oil, has historically fluctuated around the 65 per cent mark. In September 2011 this ratio reached 80 per cent. However, following the de-linking of propane from crude, this ratio declined to 43 per cent in September 2012. Figure 1 illustrates this de-linking of crude and propane prices historically and projects the de-linking using futures prices to April 2013.

Figure 1 - Propane and Crude Oil (WTI) Prices

Figure 1 - Propane and Crude Oil (WTI) Prices

CME Futures as of 1 November 2012.

U.S. propane production in 2012 averaged about 1.2 million barrels per day. By 2013, production is forecast to grow to 1.3 million barrels per day, largely from increased output from natural gas processing plants. Approximately 45 per cent of propane in the U.S. is produced at refineries and the remaining 55 per cent is produced by gas processing plants. In Canada, the vast majority of propane is produced at gas processing plants.

While propane prices have declined against crude oil, propane remains high relative to natural gas. Natural gas prices being below natural gas liquids (NGL) prices provide a strong incentive for gas producers in North America to develop liquids-rich shale plays such as the Eagle Ford and parts of the Marcellus. The development of unconventional oil from shale in U.S. plays such as the Bakken, Niobrara and Eagle Ford is also contributing to an increase in NGL production as the natural gas associated from these oil plays is also rich in liquids. The result is strong supply of NGL in Canada and the U.S. that has placed considerable downward pressure on propane prices over the past year.

Figure 2 illustrates the fractionation (or “frac”) spread - the value received on the sale of propane minus the cost of replacement natural gas - calculated using propane prices at Mt. Belvieu, Texas and natural gas prices at Henry Hub. The frac spread is a measure of the financial incentive to extract propane and other gas liquids from the natural gas stream. While 2011 was a profitable year for NGL extraction, the frac spread has shrunk considerably since early-2012 largely on account of declining propane prices, but also due to increasing natural gas prices.

Figure 2 - Fractionation Spread (Mt. Belvieu propane and Henry Hub natural gas)

Figure 2 - Fractionation Spread (Mt. Belvieu propane and Henry Hub natural gas)

CME Futures as of 1 November 2012.

As a result of this strong supply, propane storage in Canada and the U.S. is well above the five-year average. At the beginning of November, Canadian storage of specification propane reached 10.2 million barrels, approximately 13 per cent higher than the five-year average. The bulk of this surplus is in Ontario as supplies in Alberta and Saskatchewan are close to the five-year average for November. In the United States, propane storage reached 73.6 million barrels in early November, far exceeding the high storage levels of 69.6 million barrels witnessed in November 2009. While storage in all U.S. regions (or PADDs) is above average levels for November, the bulk of the surplus is in the U.S. Gulf Coast (PADD III) region where propane storage levels are 7.6 million barrels above average. Ample volumes of propane in storage across Canada and the U.S. will continue to place downward pressure on North American propane prices.

On the demand side, the worst drought to affect the U.S. Midwest in half a century is having significant implications for seasonal propane demand. Propane is used in agriculture to power irrigation pumps, run generators and equipment and to dry products such as corn, soybeans and tobacco. Earlier in the summer, the U.S. Department of Agriculture predicted a bumper crop of 14.8 billion bushels of corn. As of October, that figure has been revised downward to 10.7 billion bushels. The drying of corn can place significant upward seasonal demand pressure on propane prices if the growing season has been a wet one. That is not expected to be the case for the 2012 harvest, resulting in a downward influence on price.

With weather forecasts from Environment Canada and the NOAA calling for an average winter for most of North America and a warmer than average winter in the U.S. West and Midwest, there may be some downward pressure on prices due to lower heating demand from the residential and commercial sectors.

Demand for propane from the petrochemical industry is expected to remain close to the status quo. Ethane remains the preferred feedstock for the petrochemical industry in North America due to favourable economics and abundant supply. Propane is the second preferred feedstock and makes up approximately 20 per cent of the feedstock requirements for U.S. petrochemical crackers.

Lastly, the trend of high overseas exports of propane, and to a lesser extent, butane, from the U.S. continues as U.S. prices are below prices in markets such as Latin America, the Caribbean and Europe. U.S. exports of propane and butane hit a record 6.2 million barrels in July. In August, the trend continued with 6.1 million barrels exported, five million of which were propane. These high export volumes are expected to continue throughout the winter months. Furthermore, markets for the supply of North American NGL are about to widen, with plans to almost double U.S. Gulf Coast export terminal capacity from four million barrels per month to seven million barrels per month by late-2013.

These factors all lead to wholesale propane prices this winter being lower than wholesale prices from last winter. Propane at the Edmonton hub will trade in a range between 23 and 28 cents per litre, and Mt. Belvieu will trade between 95 and 105 U.S. cents per gallon.

Historical and Forecast Prices

  Nov 2011 to Mar 2012
Oct 2012
Nov 2012 to Mar 2013
Outlook Range
35 26 23 - 28
Mt. Belvieu
(US cents/gal)
139 96 95 - 105
Note: to convert from cents per litre to U.S. cents per gallon, multiply by 3.79 and then by the Canada-U.S. exchange rate.

Propane Price Pressures

The following illustration highlights some of the key upward and downward price drivers in the NEB’s 2012-13 Winter Outlook.

upward pressure
  • US overseas exports: Propane is fetching higher prices in markets outside of North America. These markets are providing an outlet for ample North American NGL supply.
    (upward pressure)
  • Seasonal demand: North American propane demand peaks in the winter months due to increased heating demand.
    (upward pressure)
uncertain pressure
  • Price of crude oil: Propane prices have delinked from crude prices since mid-2012, and crude prices are expected to remain around US$90 per barrel over the winter.
    (uncertain pressure)
  • Extraction economics: The economics of extracting lighter liquids such as ethane and propane have declined since last winter. However, U.S. production from liquids-rich shale oil and gas plays is expected to remain high.
    (uncertain pressure)
downward pressure
  • Inventory levels: High inventories in the U.S. and Canada will ensure ample supply over the winter.
    (downward pressure)
  • Midwest drought: The drought plaguing most of the U.S. Midwest has impacted the 2012 harvest and has resulted in lower demand for corn and soybean drying.
    (downward pressure)


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