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Propane and Natural Gas – Birds of a Feather Not Flying Together

Propane is a versatile source of energy common in rural areas that are “beyond the main” of utility natural gas service.  It is often used for home space and water heating and cooking, as well as for agricultural uses such as crop drying, irrigation pump fueling, space heating in green houses, pig and poultry brooding, frost protection, standby electricity generation, and even food refrigeration.

Where does propane come from?

Propane is produced in association with natural gas (along with other natural gas liquids, or NGLs) and is also a byproduct of crude oil refining.  Because propane is a gas at atmospheric pressure, it is compressed into a liquid state under moderate pressure for storage and delivery.

The shale gas revolution has led to dramatic increases in natural gas production.

As previously reported, US natural gas prices have remained low for some time.  This is despite the existence of many influences that more recently would have driven natural gas prices upward (see Natural Gas Market Update, June 2018).

Because propane is produced in association with natural gas, along with the dramatic increase in US natural gas production has come a dramatic increase in US propane production.  As natural gas production has increased, so has NGL production.

With such an increase in propane supply, propane prices, like natural gas prices, are low – right?

No.

While natural gas prices have remained low (red line below), propane prices have risen significantly (blue line below).

    

Why?

Exports of propane from the US have grown and continue to grow.

Conclusion

Rural residential and agricultural customers who rely on propane rather than natural gas are not benefiting from the shale gas revolution to the extent that others are in the US.  Increasing propane exports are a major driver of this phenomenon.  This is another illustration of the complicated dynamics underlying energy commodity markets and an example of how those markets can change over time, often in unexpected ways.

Note:  Evelyn Teel contributed to this article.

The Avalon Advantage – Visit our website at www.avalonenergy.us, call us at 888-484-8096, or email us at info@avalonenergy.us.

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Copyright 2018 by Avalon Energy® Services LLC

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Natural Gas Market Update

The above graph looks at natural gas prices going back to January 1997.

Natural gas prices have retreated from the Polar Vortex bump and remain relatively low by historical standards.

The prices plotted above are not adjusted for inflation.  If they were in 2014 dollars, the left side of the curve would be more elevated.  In real dollars, today’s prices are lower than they appear on the graph.

Looking to the futures market, the effects of the Polar Vortex lingered into the summer over concern about whether or not there was sufficient supply of natural gas to refill storage after the dramatic drawdowns during January and February.

This is highlighted on the left side of the blue line above which plots the 36 month futures curve as of 4/29/14.  This curve is backwardated, meaning the months close in time were priced above the months further out in time.

The near dated months have since retreated as concerns about storage refill have diminished because of (a) greater natural gas production than expected, and (b) unusually mild summer weather reducing summer time electricity load and the related reduced demand for natural gas.

This is highlighted on the red line above which plots the 36 month futures curve as of 10/24/14.  The months closer in time have declined significantly with the December ’14 contract down $1.26/mmBtu or 25%.  The entire curve has declined as well, though to a lesser extent.   The futures curve is no longer backwardated.

The table above shows the simple average of the monthly prices of the 36 and 48 month forward curves as of 4/29 and 10/24.

Overall, the 36 month futures curve is down 14.7% while the 48 month curve is down 12.7%.

The graph above looks further ahead at the 60 month futures curve which indicates that the market expects prices to rise.

While the curve is upward sloping, five years into the future, natural gas is trading well below $5/mmBtu.

Summary:

Over the past six months, market sentiment has swung from concerns that natural gas supply cannot keep up with storage injections – and upcoming winter demand – to the reverse.  Now the talk is more about an oversupplied market.  While there is low correlation between crude oil and natural gas prices, the recent decline in crude oil prices has contributed to overall bearish sentiment.  Generally, the best time to go long is when the market sentiment is most negative.  We may be approaching that point for natural gas.

The Avalon Advantage – Visit our website at www.avalonenergy.us, call us at 888-484-8096, or email us at jmcdonnell@avalonenergy.us.

Notes:

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Copyright 2014 by Avalon Energy® Services LLC

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Market Update, November 6, 2013

For buyers, pricing in the wholesale natural gas market is attractive.

The graph below shows natural gas prices over the past ten years.  While we are not at the absolute low, we are near the bottom.

The next graph shows the 24 month forward curve for natural gas.  The line is upward sloping, meaning the market expects prices to rise in the future.

The story is similar with electricity as the two markets – natural gas and electricity – are highly correlated in the Mid-Atlantic.

It is a great time to be a buyer.

The Avalon Advantage – Visit our website at www.avalonenergy.us, call us at 888-484- 8096, or email us at jmcdonnell@avalonenergy.us.

Please feel free to share this article.  If you do, please email or post the web link.  Unauthorized copying, retransmission, or republication is prohibited.

Copyright 2013 by Avalon Energy® Services LLC

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Time to Draw Down the Strategic Petroleum Reserve? – Part 2

It has been argued that there is too much crude oil in the Strategic Petroleum Reserve and that it should be drawn down.  Arguments have been made that one should “tie the amount of insurance you carry to the size of the need.”  By that argument, because domestic production is up and “hit record levels in 2011,” and imports “have dropped by more than 20% since 2006,” the reserve is “just too big and full” (see note 1).  It has also been claimed that over the first 30 years of the SPR’s existence, “its volume averaged fewer than 550 million barrels – 75% of capacity” (see note 2).

Background

The creation and stocking of the US Strategic Petroleum Reserve was enabled by the Energy Policy and Conservation Act of 1975 (EPCA).  The EPCA stated that the purpose of the Act was “…to provide for the creation of a Strategic Petroleum Reserve capable of reducing the impact of severe energy supply interruptions.”    See previous discussion concerning the SPR here.  The SPR can hold a total of 727 million barrels of crude oil and is currently at 96% capacity.

Over time, how much crude has been held in the SPR?   

The graph below shows the stock of crude oil in the SPR since its creation.

Over its life, the SPR has held an average of 519 million barrels of oil, which is 72% of its capacity.  As you can see on the graph, it took many years to construct and fill the SPR.  In fact, it was as recently as December 27, 2009 that the SPR actually reached its full capacity of 727 million barrels.  However, the many years it has taken to fill the SPR isn’t relevant concerning the working level for which it was designed.  The SPR was intentionally filled slowly so as to not appreciably affect the market price of petroleum products.   This has been accomplished in part by using royalty-in-kind crude oil from US Outer Continental Shelf leases.  In 2005, EPCA was amended to increase the size of the SPR to one billion barrels, in part as recognition that US crude oil consumption has increased since 1975.  Efforts to expand the SPR to one billion barrels were suspended in 2011.

How exposed are we to foreign imports?

Today, crude oil imports represent 42% of US consumption.  The graph below shows the ratio of net imports to US consumption plotted over time.

In 1975, when the Energy Policy and Conservation Act was enacted, crude imports represented 36% of total US consumption.  After that, imports rose to 47% during December 1977, declined to 27% in October 1985, and then generally rose again to a peak of 66% during October 2005.  Since October 2005, imports have fallen to 42%.

Conclusion

While it is accurate to say that imports have fallen from a high of 66% to 42% today, imports are still above 36%, the level of imports that existed at the time EPCA was enacted in 1975.  While US dependence on crude oil imports has dropped over the last seven years, today it is greater than it was in 1975.  Relying on the original intent when the SPR was established, there is no need to draw down the SPR.

Note 1 – Opinion piece by Austan D. Goolsbee in the The Wall Street Journal, April 10, 2012.

Note 2 – IBID.

The Avalon Advantage – Visit our website at www.avalonenergy.us, call us at 888-484- 8096, or email us at jmcdonnell@avalonenergy.us.

Copyright 2012 by Avalon Energy® Services LLC

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Time To Draw Down The Strategic Petroleum Reserve?

What is the Strategic Petroleum Reserve?

The Strategic Petroleum Reserve consists of a number of large underground caverns created in naturally occurring salt diapirs (domes) along the Gulf Coast of the United States.  The caverns were created by drilling wells into the salt domes, dissolving the salt with water, pumping the salt water solution to the surface and disposing of the solution.

The creation of the SPR was enabled in 1975 by the Federal government in response to the 1973-74 Middle East oil embargo.   More specifically, the Energy Policy and Conservation Act of 1975 stated the purpose was “…to provide for the creation of a Strategic Petroleum Reserve capable of reducing the impact of severe energy supply interruptions.”   Maintained by the US Department of Energy, the SPR, with about 700 million barrels of capacity, is the world’s largest government-owned emergency crude oil stockpile.

The Energy Policy and Conservation Act defines “severe energy supply interruption” as “… a national energy supply shortage which the President determines – (A) is, or is likely to be, of significant scope and duration, and of an emergency nature; (B) may cause major adverse impact on national safety or the national economy; and (C) results, or is likely to result, from (i) an interruption in the supply of imported petroleum products, (ii) an interruption in the supply of domestic petroleum products, or (iii) sabotage or an act of God.”

The SPR currently holds about 700 million barrels of crude oil and is about 96% full.  With a maximum draw down rate of about 4.5 million barrels per day, at the US’s current consumption rate of 18.7 million barrels per day, the SPR could supply about 24% of our domestic needs for a little more than five months.

There have been seven petroleum sales from the SPR, four of them significant:

In addition, there have been 10 petroleum loans made by the SPR.  Loans are made to oil companies to help resolve logistical problems.  Oil is returned to the SPR along with additional oil as interest.

Stocks of crude oil in the SPR over time are graphed below:

What do the fundamentals look like in the crude oil market?

Currently the US market for crude oil is adequately supplied.  According to the Energy Information Administration, demand for crude oil in the US is expected to decline again this year to a 15 year low of 18.7 million barrels per day.  At the same time, US crude oil production continues to rise.  Crude oil production in North Dakota alone was nearly 700,000 barrels per day this past June, up from 350,000 barrels per day in January 2011. For a strong indicator of how adequately supplied the market is, look at the market’s response to Hurricane Isaac.  Crude oil prices rose some, but not much.  Previous hurricanes in the US Gulf Coast, or even the threat of hurricanes, have driven prices up significantly.

Are there any supply disruptions in the world oil markets?

Sanctions against Iran have led to a decline in Iranian output to about 2.5 million barrels per day, down from 3.5 million barrels per day at the beginning of 2012.  At the same time, Iraqi oil production continues to recover.  For the first time in over 20 years Iraqi production this summer was greater than Iranian production – 3 million barrels per day versus Iran’s 2.9 million barrels per day.  Last month Saudi Arabia produced as much as 9.9 million barrels per day, and has indicated that it may increase production to 10 million barrels per day, a 30-year high.

International supply disruptions have become less of a threat to the US economy.  The US currently imports about 42% of its crude oil.  This is down from more than 60% as recently as 2006.  And, the EIA expects imports to drop again in 2013 to 39%.  This would be the first time US imports have been below 40% since 1991.

So, if the market is adequately supplied, and supply disruptions are not an issue, why are crude oil prices elevated?

First, monetary easing on the part of the Federal Reserve has led to higher crude oil prices.  Crude oil is traded in dollars.  As the US money supply increases, the value of the US dollar relative to other world currencies declines.  Non-US oil companies have to raise their price in dollar terms just to keep the economics even in their home currencies.

The second driver is geopolitical risk.  Tensions in the Middle East play a role as oil consumers and traders tend to increase inventories (increase demand) as a protective measure in the event that there is a disruption of supply.  This risk tends to drive up spot crude oil prices as well as the short end of the crude oil forward curve.

A good way to see the interplay between the seemingly opposing states of (a) adequately supplied crude oil markets and (b) elevated crude oil prices is to look at the forward curve.  Only the short end of the forward curve has risen.  Beyond May 2013 (8 months), the forward curve is downward sloping, meaning the market expects crude oil prices to decline in the future.  Interestingly, the short end of the forward curve fell more than 7% over the past trading week.  See graph below.

Is there good reason to draw down the SPR?

There are no “severe energy supply interruptions,” and market fundamentals are supply heavy.  US crude oil production is up and continues to rise.  Imports to the US have declined and continue to do so.  There is more than adequate supply in the market to offset reduced exports from Iran.  While there may be many political reasons to draw down the SPR, there are currently no strategic reasons to draw down the SPR based on market fundamentals.

The Avalon Advantage – Visit our website at www.avalonenergy.us, call us at 888-484- 8096, or email us at jmcdonnell@avalonenergy.us.

Copyright 2012 by Avalon Energy® Services LLC