Why depleted propane inventories mean price spikes and volatility

Ingrid Pan, CFA

Key analysis: The most important trends in propane right now (Part 3 of 7)

(Continued from Part 2)

Depleting inventories

As we discussed in the prior parts of this series, several factors—such as an abnormally cold winter, higher demand for crop drying from agricultural end users, and increased propane exports—have all boosted propane demand, depleting inventories. U.S. propane inventories at the end of December were 46 million barrels, 21 million barrels below that of December 2012 and 19% below the five-year average.

High propane demand and low propane stocks have caused spiking prices and volatility.

AmeriGas commented that the increase in propane demand and low propane inventory levels have “given rise to extraordinary increases in posted prices, ongoing supply disruptions at several pickup points, and most recently, national media attention.”

Suburban Propane (SPH) noted that average prices for propane at Mont Belvieu of $1.20 per gallon were 35% higher than a year ago, when prices averaged $0.89 per gallon. The company further noted that propane prices underwent an accelerated move upward in December, when average posted prices were 59% higher than December 2012 at the Mont Belvieu natural gas liquids hub. Plus, average posted prices at other supply points increased at an even greater rate.

Propane distributors normally try to pass on higher wholesale propane costs to their end customers, taking a fixed margin. However, the recent supply and demand situation in propane has caused propane prices to sometimes experience intense volatility. SPH management commented, “As far as margins are concerned, I think that we’re doing the best we can with respect to pricing and trying to pass on as much of the cost as possible. However, in some markets on an intraday basis, we’ve seen price changes as high as $0.30, $0.35 which is near impossible to just pass that on particularly, for that day’s deliveries.”

As we’ve noted, cold weather may be posting propane demand, but this has created issues for some propane distributors. Read on to the next part of this series to see why these companies may not have the blowout winter heating season you might expect with cold weather.

Continue to Part 4

Browse this series on Market Realist: