US shale supply boom sends propane prices tumbling to 13-year lows

By KELLY GILBLOM and DAN MURTAUGH
Bloomberg

The fuel that will grill millions of hot dogs across the US on the Fourth of July is giving energy producers heartburn.

Propane inventories have soared to the highest seasonal level in more than 30 years, sending prices in Texas to a 13-year low and forcing sellers in Canada to pay people to take it away.

The bargain-basement price is a byproduct of the US shale boom, as record production of natural gas has doubled the supply of propane, commonly used for heating, crop-drying and cooking. The glut of natural gas liquids has turned the US into the world’s biggest supplier and helped revive the nation’s petrochemical industry.

“We’ve gone from North America being a net importer of propane to the US being the single largest exporter of propane,” said Michael Sloan, a Fairfax, Virginia-based principal at consulting firm ICF International. “It’s a good time to fill up your propane tank.”

Propane in Mont Belvieu, Texas, the largest storage site in the world, traded at 35.25 cents/gal on Tuesday, down 68% from Sept. 16. It fell to 31.5 cents on June 5, the lowest level since 2002. When producers extract natural gas from shale rock, it often comes up in a single stream that contains other fuels, including propane.

Natural gas for July delivery rose 0.6% to $2.743/MMBtu in electronic trading on the New York Mercantile Exchange at 9:56 a.m. New York time on Wednesday.

Negative Prices

In Edmonton, where a pipeline that used to deliver propane to the US Midwest was reversed last year, prices on the spot market have fallen below zero, so sellers have to compensate buyers to take the product. The price has averaged a negative 5.8 cents this month, according to data compiled by Bloomberg.

Field production of propane rose to a record 1.1 million bpd in March, almost double what it was five years ago. Inventories of propane and propylene, a related chemical, were 58.1 million bbl, the highest for March since 1982.

Stockpiles were 80.7 million bbl as of June 12. Over the past five years, supplies have risen an average of about 40% from mid-June to mid-September before declining as heating and agriculture use increases. If the pattern persists this year, supplies will hit a record 113 million.

Marketers are scrambling to build more storage and export terminals. Sunoco Logistics is spending $3 billion to resuscitate an oil refinery at Marcus Hook, Pennsylvania, that closed four years ago into an export hub for propane and other gas liquids.

Underground Caverns

The complex has 800 workers on round-the-clock shifts to complete the project. The facility already has a storage cavern carved like a honeycomb 400 feet into the granite underground that can hold 1 million bbl of propane, which are fed into tankers that dock at its eastern edge to be exported.

A pipeline from the Marcellus shale formation across the state is full, and trains and trucks bring in additional fuel.

Propane and butane exports, which have jumped almost fourfold since 2010, will rise to a combined 800,000 bpd by the end of 2016 from about 500,000 last year, according to Anne Keller, an analyst at Wood Mackenzie.

The falling prices have been a boon for chemical companies that use the gas as a feedstock, including Dow Chemical, LyondellBasell Industries and Westlake Chemical, said Hassan Ahmed, a petrochemical analyst for Alembic Global Advisors, in a note to clients on June 15.

Producers Hurt

Natural gas producers are being hurt the most by falling prices, said Charles Blanchard, an energy analyst for Bloomberg New Energy Finance in New York. Midstream companies that move and process NGLs may also earn less if they have contracts tied to commodity costs.

Propane’s slump could be short-lived. Consumption typically picks up in the late fall during crop-drying season and then in the winter for home-heating. Propane swaps for December on the New York Mercantile Exchange were 50 cents/gal on June 22, a 28% increase from July prices.

“People should be buying everything they can get their hands on and filling storage for use over the next year or six months,” said Dan Lippe, president of Petral Consulting Co. in Houston. “There are just too many reasons for buyers to see a once-in-a-lifetime opportunity and suck it all up.”

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