Propane prices may see additional pressure in 2024, even after a disappointing 2023 for producers. Robust supply, stagnant export capacity, and already-elevated inventories spell trouble.
Propane prices at Mont Belvieu came under pressure in late 2023, as propane in the U.S. was well supplied. A recent winter storm in January helped spur more propane demand and push propane prices toward 80c/gal for the prompt month. If we agree the recent rally was weather-driven, and structurally, propane remains well supplied, then this year’s supply-demand balance looks worse, the price outlook is worse, and the 2024 strip may soon come under pressure relative to crude oil prices.
Although propane has its own supply-demand fundamentals, it’s common to analyze propane prices as a percentage of WTI. The chart below shows propane’s price as a percentage of WTI in barrels. In the past six years, propane prices at Mont Belvieu have averaged around 53%. However, most of last year set a six-year low, as is shown in the following chart. Due to oversupply in the U.S. Gulf Coast, propane’s relative value to WTI has been quite depressed – averaging below 40% for most of 2023. The recent spike in heating demand in January 2024 helped lift this percentage into the mid-40 percent.
The forward curve of propane
The chart below shows the propane-to-WTI relationship in the forward curve. Propane’s price rises more than crude, as evidenced by the increasing percentage. The continued heavy reliance on exports of Gulf Coast propane could put pressure on this relationship in 2024 due to weaker propane fundamentals. WTI sits higher than realized prices in 2023, causing us to worry that propane may severely weaken against crude after winter weather fades.
There is no bright spot
We expect higher supply with little growth in demand or export capacity. Maybe inventories could help? Nope. One of the gauges of health for the propane market is the level of inventories. Propane stocks in 2023 (light blue line) were far above the five-year average. To start 2024, cold weather induced a reduction in inventories. Demand was elevated, but freeze-offs from oil and gas wells reduced supply. There was more than a 20-Bcf reduction in natural gas production for a few days due to freeze-offs. Without help from weather in the rest of Q1, propane will need to continue to rely on heavy export utilization to avoid high levels of storage.
Exports
Speaking of exports, LPG export capacity in the Gulf Coast (PADD III) is without additional capacity until 2025. Propane supply (blue line) has risen over the last few years, and the U.S. propane complex has relied increasingly on exports to clear excess production. The chart below shows the yearly averages of butane and propane exports in PADD III.
According to S&P Global estimates, future propane exports (dotted blue line) on the chart below are expected to average just under 2 MMBbl/d for PADD III in 2024. The graph implies some excess capacity in 2024 versus estimates, but there’s more to that story. The grey area is the total existing nameplate capacity of PADD III docks, and future expansions are color-coded. As RBN Energy points out, the nameplate is what the terminal can export if everything is perfect. A more realistic utilization capability is closer to 90-92% (1.9 MMBbl/d), according to RBN estimates. Export capacity in 2024, before new dock expansion comes online, could be tight. This could stymie propane’s method of dealing with excess supply if it becomes problematic.
