Higher inventories, milder weather, and falling crude oil and natural gas prices have resulted in a Midwest propane market that so far this winter has not experienced the challenges faced last winter, when the combination of depleted inventories and high winter demand pushed propane prices to record highs prompting emergency measures to address propane supply shortfalls. This winter, Midwest propane markets are well-supplied; however, the changes prompted by the events of last winter continue to influence the market.

As of January 30, Petroleum Administration for Defense District (PADD) 2 (Midwest) propane inventories are 11.8 million barrels above the same time last year and 6.3 million barrels more than the five-year average. Propane inventories in the Midwest began building in the summer and by October 31 were 6.3 million barrels higher than the same time in 2013 and 0.7 million barrels higher than the five-year average. Inventories have remained high since then (Figure 1) because of lower demand during a less-severe winter, with Midwest heating degree days so far this winter (October–January) 8.5% below the comparable year–ago period.

The preseason inventory builds were supported by higher prices this past summer at the Midwest propane storage hub in Conway, Kansas, compared with prices at the Mont Belvieu, Texas, storage hub. Higher Conway prices kept Midwest propane production in the Midwest rather than being sent to other regions increasing inventories.

The higher inventories, less-severe winter weather, and falling crude oil and natural gas prices have caused spot propane prices to fall. Spot prices reflect feedstock costs, processing costs, and overall market conditions, including demand and inventory levels. In 2013, 59.3% of propane produced in the United States came from the processing of natural gas, while 40.7% was from refinery crude oil processing. Because propane is produced from both natural gas and crude oil, the price of propane is related to the prices of both commodities. Since 2012, propane prices have tracked between crude oil and natural gas prices on an energy-equivalent basis. Recent falling crude oil prices have significantly narrowed the spread between crude oil and natural gas, and have pushed propane prices lower (Figure 2).

Spot propane prices at Conway and Mont Belvieu averaged $0.97 per gallon and $0.94 per gallon, respectively, in October 2014, $0.14 per gallon and $0.20 per gallon less than at the same time in 2013. As crude oil prices began to fall and propane inventories continued to build in both the Midwest and the Gulf Coast (PADD 3), spot propane prices at both hubs fell. By December, Conway and Mont Belvieu propane spot prices averaged $0.53 per gallon and $0.56 per gallon, respectively. For the week ending January 30, prices at Conway averaged $0.45 per gallon, $2.06 per gallon lower than the same week last year, when supply shortages were most acute (Figure 3).

Although Midwest propane inventories are still quite high, last winter’s propane supply shortages, as well as changes in infrastructure and supply patterns, continue to affect Midwest wholesale and retail propane markets. Before January 2014, the spread between Midwest retail and wholesale prices averaged $0.65 per gallon, reflecting traditional propane supply and distribution patterns from supply sources to the wholesaler and then to the propane retailer. However, as propane markets tightened last winter (2013-14) this spread rapidly increased as costs for moving supplies through the supply chain increased. Although propane markets this winter are not experiencing problems, the retail-wholesale price spread has not returned to historical levels.

Changes in infrastructure, including the repurposing of the Cochin pipeline, have changed logistical networks for propane markets in the region. Propane supply networks now increasingly rely on relatively more expensive rail and long-range truck shipments. Propane wholesalers and retailers have also made changes to secure supplies well in advance of winter and have increased the amount of propane they hold in inventory. Wholesalers and retailers that opted to purchase propane well in advance of this winter likely did so when prices were about $0.50 per gallon higher than current prices. Propane retailers also encouraged customers to switch from will-call to firm contracts with automatic delivery, which provides greater security of supply but less flexibility on price. These changes in the supply chain have caused the retail-wholesale propane price spread in the Midwest to widen. The spread, which averaged $0.86 per gallon for October, an increase of $0.22 per gallon from 2013, was $1.32 per gallon as of February 2 (Figure 4).

U.S. average gasoline price increases, diesel fuel prices continue to fall

The U.S. average price for retail gasoline rose last week for the first time since September, increasing two cents to $2.07 per gallon as of February 2, 2015, $1.22 per gallon less than the same time last year. Only Midwest and Gulf Coast prices increased, by nine cents and one cent, respectively, to $2.03 per gallon and $1.86 per gallon. The East Coast price was down two cents to $2.09 per gallon, while the Rocky Mountain price fell one cent to $1.87 per gallon. The West Coast price lost less than a penny to remain at $2.33 per gallon.

The U.S. average price for diesel fuel decreased four cents to $2.83 per gallon, down $1.12 per gallon from the same time last year. The West Coast price fell six cents to $2.89 per gallon. Midwest and East Coast prices both decreased four cents, to $2.77 per gallon and $2.93 per gallon, respectively. The Rocky Mountain price was down three cents to $2.78 per gallon, while the Gulf Coast price decreased two cents to $2.77 per gallon.

Propane inventories fall

U.S. propane stocks decreased by 2.1 million barrels last week to 67.2 million barrels as of January 30, 2015, 36.4 million barrels (118.0%) higher than a year ago. Midwest inventories decreased by 1.1 million barrels and East Coast inventories decreased by 0.5 million barrels. Gulf Coast inventories decreased by 0.4 million barrels and Rocky Mountain/West Coast inventories decreased by 0.1 million barrels. Propylene non-fuel-use inventories represented 6.1% of total propane inventories.

Residential heating fuel prices decrease

As of February 2, 2015, residential heating oil prices averaged less than $2.80 per gallon, almost 2 cents per gallon lower than last week, and $1.44 per gallon less than last year's price for the same week. Wholesale heating oil prices averaged $1.83 per gallon, 7 cents per gallon higher than last week and $1.61 per gallon lower when compared to the same time last year. Residential propane prices averaged less than $2.37 per gallon, about 1 cent per gallon lower than last week, and $1.52 per gallon less than the price at the same time last year. The average wholesale propane price decreased by nearly 2 cents per gallon this week to 61 cents per gallon, $2.09 per gallon lower than the February 3, 2014 price.