Where Are Propane Prices Headed?

Saudi Aramco IPO

Everyone expects crude oil and propane prices to move higher. It’s not really a tough call, is it? After all, OPEC agreed to extend their production cuts through 2018.

Their combined production is the lowest in 7 months.
Their quota adherence rate last month was over 130%.

Perhaps US crude producers have “gotten the message” from OPEC and won’t let production get out of hand for fear that Russia and OPEC will open up the spigot and drive prices below the marginal US cost level of $50/bbl.

A conspiracy theorist may even suggest that the US administration is working with producers to keep crude prices high until Saudi Arabia makes their initial public offering (IPO) early next year for shares of their national oil company, Saudi Aramco. At an estimated $2 trillion dollars, it will be the largest IPO in the world. The quid pro quo would be: Bring your Aramco IPO to Wall Street and we won’t undermine your production cuts.

So I understand why prices could go higher in the short term.

The Scorpion and the Frog

We all know the fable about the scorpion that asks a frog to carry him across a river, only to sting the frog before reaching the other side. “Why have you stung me, you silly fool?” croaks the dying frog, “For surely now, we will both drown.”

“It’s my nature,” deadpans the scorpion.

Hedge Hog

If you’re a US producer and you simply can’t resist the urge to increase your production to take advantage of the highest crude prices in 2.5 years (and the chance to increase your market share while OPEC is asleep), how do you protect yourself from another market collapse?

Well, you hedge your future production. You lock in prices now by layering in sales of future production. As you increase your hedging activity at progressively more profitable levels, your 2018 budget improves, and it’s much easier to get the money you need to “drill baby drill”.

Not surprisingly, oil hedges have increased dramatically (145%) from Q2 to Q3, the highest quarterly percentage increase in two years. That trend is likely to continue as long as price and production continue to move higher.

The last time US crude production was higher than it is now, Tony Orlando and Dawn were recording “Tie a Yellow Ribbon Round the Ole Oak Tree.”

So, let me ask you. If crude prices move higher from here ($57.68/bbl.) knowing that higher prices may tempt your domestic and global competitors to increase production, what would you do?

Hope for the best? Or continue to sell a percentage of your projected future production at higher and more profitable levels and then get cranking?

After all, it isn’t a question of crude oil reserves being in short supply. It's a question of price. Let another country or company look for a chair when the music stops.

The Crown Prince

The new Crown Prince Mohammed bin Salman is a young, progressive-thinking leader who is strongly motivated to modernize Saudi Arabia, and ultimately, move his country beyond reliance on oil income.

He may even believe that oil is not the future. Sell high and get out before crude oil becomes the dinosaur!

Propane price chart

Here’s a 12-year chart of posted propane prices for Mt. Belvieu, TX, and Conway, KS, courtesy of Butane-Propane News.

Note: The spot price in the graph below is similar to an OPIS average. “Group 140” is a colloquial term for Conway, KS, which refers to the underground NGL storage caverns in the area.

PDI Graph

“How do I tell the difference between a correction and a new price trend”?

Look at the chart above. You’ll see many price corrections, which help define where the support (downside) and resistance (upside) levels are. If you were to draw parallel lines along the top and bottom of these price points, two or three years at a time, you’d have a channel. As you can see, the start of every lower price trend occurs when the price breaks solidly below the lower trend line of a channel.

Any other market weakness is just a correction.

Unfortunately, we haven’t had a substantial price correction since the market started moving higher in June, so we are now bumping up against the upper trend line of a rising price channel that started back in late 2015. Typically that would suggest that a price spike well above the trend line or a healthy price correction is in store for us.