Shale Boom Rocks Propane

Propane producers are getting burned as supplies of the fuel outstrip demand, pushing prices lower.

The energy boom that has left the U.S. awash in oil and natural gas is also churning out record amounts of propane, which is used to make plastics and to provide heat. Propane prices are down 39% from a high of $1.70 a gallon reached in January, when a severe winter boosted demand for the fuel to heat American homes.

“The volumes of gas liquids that are coming out of any of the shale plays…continue to grow,” says Michael Angell, markets editor for the Oil Price Information Service, which tracks the price of propane for immediate delivery. “The U.S. is limited in how much it can consume.”

U.S. demand for propane has declined as more households have converted to natural gas or electricity for indoor heating. About 4.6% of U.S. households use propane for heating, compared with 5.2% five years ago, according to the U.S. Energy Information Administration.

Producers have turned to overseas customers to take up the slack. Propane can be shipped abroad, unlike most types of U.S. crude oil, and exports have jumped in the past year. In October, propane and propylene exports climbed above 400,000 barrels a day for the first time and have held above that level in five of the nine months since, according to EIA data going back to 1973. The EIA doesn’t separate its data for propane from propylene.

EXPORTS WILL BECOME THE LARGEST SOURCE of demand for U.S. propane by next year, according to consulting firm Bentek Energy, a unit of McGraw Hill Financial Inc. “We’re going to be exporting a lot more propane,” from about 25 cargoes a month currently to about 40 cargoes a month next year, says John Dwan, partner at Houston brokerage Ion Energy Group, which is owned by OTC Global Holdings.

Even so, analysts say, the export market won’t be enough to absorb the growing supplies. U.S. propane output has soared in recent years due to new technologies that enable producers to access supplies trapped in shale-oil fields. Production reached a record high of more than 1.6 million barrels a day in the week ended on Sept. 19.

Bentek expects propane prices to hold below $1.50 a gallon through 2020, as output nears 1.8 million barrels a day, according to a September presentation. Spot propane prices in Mont Belvieu, Texas, were at $1.03 a gallon on Sept. 29 according to the most recent EIA data.

Still, there is a chance that prices could get a fillip in the months ahead. Last autumn, Midwest farmers used larger-than-usual amounts of propane to dry a record-breaking corn harvest for storage. That reduced propane stockpiles, and when winter hit, consumers had to pay a premium for the fuel. Transportation snags added to costs, boosting prices to the highest in 5½ years.

Farmers are expecting to top last year’s corn harvest by as much as 3%. If the weather is as cold as last winter, there could be another spike in propane demand.

But traders say propane buyers are better prepared this year to deal with price fluctuations. Many retail propane distributors have entered over-the-counter and futures markets in the past three months to lock in prices for the upcoming winter, traders say.

via Shale Boom Rocks Propane.