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Winter Outlook 2013-14

Key Findings

  • At the beginning of October, Canadian propane inventories were 1.5 million cubic meters, slightly below the five-year average, effectively recovering from the very low levels reported at the end of the previous heating season in April 2013.
  • U.S. propane inventories at the end of October were 6 per cent below the five-year average.
  • Expectations for a mild winter could lead to lower propane demand in Canada and the U.S.
  • Propane prices that are higher relative to natural gas prices are providing a strong incentive to develop liquids-rich gas production.
  • Increased U.S. propane production, tied to shale oil and gas development, is prompting expansions in U.S. propane export capacity.
  • Propane prices in North America are expected to be at a level similar to last year, and tracking oil prices closely. Edmonton and Mt. Belvieu propane prices are expected to average 26 and 27 Canadian cents per litre respectively during the upcoming heating season.

Although propane prices have traditionally followed crude oil prices, its price relationship with West Texas Intermediate (WTI) has been affected by increased shale gas production in North America. The propane-to-WTI ratio, which is a measure of the relative price strength of propane compared with crude, has decreased from its typical value of 65 per cent in recent years to an average of 43 per cent in the spring and summer of 2013. Prices for propane and oil are linked because propane and heating oil compete in the heating market. Approximately five per cent of homes in the U.S. rely on propane for heating needs (primarily in the Midwest) while less than two per cent of Canadian homes are heated with propane.

Figure 1 - Propane and Crude Oil (WTI) Prices

Figure 1 - Propane and Crude Oil (WTI) Prices

Source: CME Futures, PIRA, NEB

The U.S. Energy Information Administration reported that U.S. propane production in July 2013 reached 1.4 million barrels per day (bbl/d), 17.6 per cent over 2012 figures. Canadian propane production during the first half of 2013 neared 161 thousand bbl/d, less than a one per cent increase over the same period in 2012. High propane prices compared with natural gas have provided a strong incentive to U.S. and Canadian gas producers to increase liquids-rich gas production. Shale oil production has also contributed to the increased propane supply, as the associated gas from shale oil is very rich in liquids.

The increased propane production in North America has depressed domestic propane prices in comparison with overseas markets, creating a strong incentive to expand U.S. propane export facilities. New export capacity came on stream in the second half of 2012 and continues to expand in 2013, helping to balance propane markets in the U.S. and avoiding the propane stock overhang observed in 2012.

Canada is the main exporter of propane to the U.S., particularly for the U.S. Midwest. Canada exported an average of 140.1 thousand bbl/d during the 2012-13 heating season, a 22.4 per cent increase from the previous winter. The increased level of exports reduced Canadian propane inventories to the very low levels reported in April 2013.

With the increase in Canadian and U.S. propane supply and the level of propane stocks in both countries in September, North American propane inventories are expected to be adequate to cover demand during the upcoming heating season.

With WTI prices expected to move between $90 and $100 per barrel for this winter, propane at Edmonton and Mt. Belvieu is expected to trade in the same price range (25 to 35 cents per litre), with Mt. Belvieu commanding a slight premium (1 to 1.5 Canadian cents per litre) over Edmonton.

Historical and Forecast Prices
  Nov. 2012 to Mar. 2013
Oct. 2013
Nov. 2013 to Mar. 2014
Outlook Range
26.3 32.1 25 - 35
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.
Mt. Belvieu
(US cents/litre)
25.8 32.8 25 - 35

Propane Price Pressures

The following illustration highlights some of the key upward, downward and uncertain price drivers in the NEB’s 2013-14 Winter Outlook.

upward pressure
  • U.S. Overseas Exports: Propane is fetching higher prices in markets outside of North America. With recently completed and proposed export terminal expansions in the U.S. Gulf Coast, export volumes are expected to continue to increase over the winter, providing an important outlet for growing U.S. liquids production.
    (upward pressure)
uncertain pressure
  • Average Inventory Levels: Propane inventories in Canada and the U.S. are close to the five-year average at the end of the injection season in October.
    (uncertain pressure)
  • Price of Crude Oil: Propane prices have increased in 2013 following the increase in crude oil. However, crude oil prices are not expected to increase significantly over the winter.
    (uncertain pressure)
downward pressure
  • Robust U.S. Gas Production: Higher natural gas prices and growing production of shale gas and associated gas from shale oil plays are expected to increase propane production in the U.S.
    (downward pressure)
  • Below-Average Seasonal Demand: Demand for propane in the U.S. and Canada will increase as lower temperatures trigger heating demand. However, a normal winter is forecast for most of North America.
    (downward pressure)


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