If there is one phrase that is nearly guaranteed to make the trading floor manager’s blood run cold it is this: “double down.”
But for US propane traders facing a glut of supply and a contango that looks like Mount Vesuvius on the outer-month price chart, doubling down might not look like the worst option.
Spot market prices for propane and other heavier natural gas liquids used as feedstocks to make plastics have finally busted the levees in the eyes of last week’s propane market. Traders in the Gulf coast energy trading center of Houston, Texas, awoke to flooded streets and submerged cars and houses last Tuesday. Meanwhile propane traded at the world’s largest NGL storage caverns plunged to 13-year lows as market players speculated that the 10-11 inches of rain had saturated and contaminated Enterprise Products Partners’ Mont Belvieu brine ponds. Enterprise declined to comment on the status of the facility.
This isn’t the first time that foul weather has significantly derailed NGL operations this spring.
Last week the EIA reported US NGL exports toppled to 748,000 b/d, down sharply from February’s record-high 1.02mn b/d.
The reason exports tanked? Days on end of dense sea fog led Houston Pilots to restrict the gateway to major export terminals in the Houston Ship Channel.
But weather aside, inventories are simply building too quickly for demand, both at home and abroad. Current propane inventories are now at 73.218mn bl, 31.13mn bl higher than a year ago during this time of the season, and 47pc higher than the five-year average.
Analysts repeat shock at the high NGL output seen in the first quarter of 2015. March levels hit historic all-time highs in the US, even in the midst of a price crisis.
So all those unthinkably long position holders did what they do best: they doubled down, and lost another half of their value.
Propane traded at the Mont Belvieu Enterprise terminal moved from a healthy average of 106¢/USG in September 2014 to average nearly half its value at 54.625¢/USG in December. Last week propane changed hands at 32¢/USG, nearly halving the December average.
The Argus NGL Forward Curves showed the May/June Mont Belvieu Enterprise contango at 4.625¢/USG on Thursday. Meanwhile the May/Q4 carry was valued at 14.375¢/USG. For a front month valued at 25pc of $58/bl crude, that’s an impossibly steep climb. Forward curve structures can be deceitful and built on the sand. But the fundamentals don’t lie.
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