Propane DOES Follow Crude Oil

With 40% to 50% of propane supplies coming from refining crude oil, there is no doubt as to the importance of crude oil to propane supply and pricing. Energy market conditions over the past few years have continued to bolster crude oil’s position as the primary driver of propane pricing.

The accompanying chart recaps propane and crude oil prices since January 2001. The crude oil data is from the Energy Information Administration and reflects West Texas Intermediate prices, while the propane prices are from BPN's Weekly Propane Newsletter “Spot Prices For Natural Gas Liquids” report and reflect Mont Belvieu TEPPCO propane spots.

The first high point along the propane graph reflects not crude oil, but natural gas’s impact on propane. From late 2000, propane prices were high because of high natural gas prices, which meant poor fractionation economics. With gas processors rejecting ethane and propane because of high feedstock prices, propane prices had to rise to keep and/or encourage propane production. By Jan. 8, 2001, Belvieu spots reached 89.50 cents/gal.

Propane prices were up on Feb. 27, 2003 with worries over war in Iraq, winter weather, and traders working on their end-of-month positions. This pushed up not only propane spots as high as 116.00 cents/gal., but also had natural gas and crude oil significantly higher. Natural gas was close to $9/MMBtu, and crude oil futures were in the $37.93/bbl range.

In late October of 2004, crude oil pushed propane prices higher following a year of strong pricing led by war in Iraq and stronger international demand. These are the same factors that continue to keep pressure on energy prices to this day. Propane spots peaked at 97.00 on Oct. 24, while crude oil was $54.95. Troubles in Norway had the markets jittery as a labor dispute threatened to impact production.

Last year was troubling with crisis after crisis pushing crude oil, and propane, prices higher. In late March, crude had climbed over $57/bbl and OPEC was trying to calm the markets by increasing production by 500,000 bbld. That act, and its inability to bring lower crude oil prices, shows OPEC’s ineffectiveness. Propane spots climbed to 95.50 cents/gal.

Later in 2005 hurricane damage along the Gulf Coast, which included key production and processing assets being knocked out, drove energy prices sky high. Propane spots at Mont Belvieu hit 120.25 cents/gal. on Sept. 22 with crude rising to $67/bbl. Those peaks came with the arrival of Hurricane Rita on the heels of Hurricane Katrina.

Although propane prices last month were trading around 100.00 for spot product. crude oil was just under the $70/bbl level. This shows that despite propane following crude's lead, supply and demand fundamentals can limit propane's price relationship to crude. A typical valuation for propane has been somewhere between 60% to 80% of the value of crude oil on a per-gallon basis, and propane has been trading at the lower end of that spectrum.

Should a supply disruption occur in the propane market, prices could be much higher: at $70/bbl crude, propane can run from 100.00 to 133.00 cents/gal., which is 60% to 80% the value of crude.

—Pete Ottman