This Week in Petroleum
Warm weather in the first half of winter led to lower U.S. propane prices and slower inventory draws
A warm start to this winter’s heating season (October through March) has led to declining U.S. propane prices, in contrast to crude oil prices that have been higher this month than during October 2021. Propane prices typically follow the price of crude oil and other petroleum products but can vary significantly, depending on supply and demand conditions, particularly in response to winter weather. Since reaching a high of $1.51 per gallon (gal) on October 5, 2021, wholesale propane prices at the U.S. benchmark location of Mont Belvieu, Texas, declined 24% to $1.15/gal as of January 24, 2022 (Figure 1). Mont Belvieu prices fell because of warmer-than-normal weather, which resulted in less propane consumption than in an average winter for space heating in the residential and commercial sectors, and in propane inventories rising relative to their previous five-winter average (winters of 2016–17 to 2020–21). Propane inventory levels at the start of the winter season were below the five-winter average and five-winter range in the Midwest, where more than 40% of homes use propane as a primary space heating fuel. U.S. propane prices remain higher than they were at the same time last year, and colder-than-normal temperatures as the winter continues could result in increased consumption, larger inventory draws, and price volatility for the next few months.
The Mont Belvieu wholesale propane price in October 2021 (the start of the winter heating season) was at its highest level since February 2014. The propane price rose from $0.83/gal in May 2021 to $1.45/gal in October 2021, a 76% increase. Although propane is typically priced at a discount to crude oil on a heating-value equivalent basis, propane held a steady premium of 11% over Brent crude oil from August 2021 until October 2021 because of a slow seasonal inventory build and strong export demand. Mont Belvieu propane returned to a small discount in November and was 11% lower than Brent crude oil in December. From January 1 to 24, 2022, the spread between propane and crude oil widened to 13%.
Inventory levels also affect prices, and before the current winter heating season, U.S. inventories were below their previous five-year (2016─2020) range. Inventories typically build from April to September, when propane consumption is relatively low. Propane inventories at the end of the last heating season (as of March 21) totaled 39.2 million barrels, 8.4 million barrels less than the five-year average. By the end of September 2021, inventories were 17.1 million barrels below the five-year average, and even 1.8 million barrels less than the five-year range. The below-average inventory build in the summer of 2021 was followed by smaller-than-average draws during the first half of the heating season, from October through December, which allowed inventories to fall back within range. In the Midwest (PADD 2), where most of the households that heat with propane and most of the demand for grain-drying is located, inventories were below range until the end of October and are now above the five-winter range (Figure 2).
The slow inventory draws were the result of low propane consumption in October, about 65,000 barrels per day (b/d) below the five-year average and 24,000 b/d less than the previous month. Propane consumption for grain drying usually supports propane demand in October, but this year’s early-maturing corn crop and dry weather during the harvest resulted in little to no grain-drying demand. In addition, winter temperatures were close to recent averages; heating degree days (HDD) were near the five-year (2017–2021) average in October and November (Figure 3). December was much warmer than average; HDDs totaled 146 days below the five-year average and 106 days below the five-year range, representing the second-fewest HDDs in December since at least 1971. The smaller inventory draw than the five-year average, as well as warmer-than-normal temperatures through December, have decreased Mont Belvieu prices by about $0.40/gal from October to December.
Trends in international markets have also influenced U.S. propane exports and the wholesale propane price. In the first 10 months of 2021, the most recent monthly data available, propane exports averaged 1.3 million b/d, the most for those 10 months in any year since at least 2004 (when our records of these data begin). Propane inventories in the Gulf Coast (PADD 3), where most U.S. propane exports originate, have remained below the five-year range since September. Global demand for propane has risen because of its rising use as a petrochemical feedstock in propane dehydrogenation (PDH) units and flexible feedstock crackers. Global demand for U.S. propane has remained steady despite higher U.S. prices because international prices for propane and other feedstocks similarly increased. As a result, the price of propane on the U.S. Gulf Coast remained at a discount to the prices in Northwest Europe and East Asia, keeping propane exported from the United States economically viable. The propane price at Mont Belvieu from October 2021 to December 2021 was 15% lower than the price in Northwest Europe and 20% lower than the price in East Asia (Figure 4).
We expect petrochemical demand for propane to continue growing as several PDH units in China come online in 2022 and as propane is increasingly preferred over other feedstocks in Asia such as naphtha. We forecast that net exports of propane will increase by 40,000 b/d in 2022 and by 130,000 b/d in 2023. We expect U.S. propane production to grow through 2022 and 2023, along with rising crude oil and natural gas production. We forecast propane production at natural gas plants and refineries to increase 100,000 b/d in 2022 and 50,000 b/d in 2023, averaging 2.2 million b/d.
U.S. average regular gasoline and diesel prices increase
The U.S. average regular gasoline retail price increased nearly 2 cents to $3.32 per gallon on January 24, 93 cents higher than a year ago. The Gulf Coast price increased more than 5 cents to $3.01 per gallon, the Midwest price increased nearly 2 cents to $3.13 per gallon, and the East Coast price increased more than 1 cent to $3.25 per gallon. The West Coast price decreased nearly 1 cent, remaining virtually unchanged at $4.16 per gallon, and the Rocky Mountain price decreased less than 1 cent, remaining virtually unchanged at $3.33 per gallon.
The U.S. average diesel fuel price increased nearly 6 cents to $3.78 per gallon on January 24, $1.06 higher than a year ago. The Gulf Coast price increased nearly 7 cents to $3.53 per gallon, the East Coast price increased more than 6 cents to $3.78 per gallon, the Midwest price increased more than 5 cents to $3.66 per gallon, the West Coast price increased nearly 4 cents to $4.49 per gallon, and the Rocky Mountain price increased 2 cents to $3.70 per gallon.
Residential heating fuel prices increase
As of January 24, 2022, residential heating oil prices averaged nearly $3.67 per gallon, almost 7 cents per gallon above last week’s price and nearly $1.10 per gallon higher than last year’s price at this time. Wholesale heating oil prices averaged more than $2.84 per gallon, almost 7 cents per gallon above last week’s price and more than $1.15 per gallo¬¬n above last year’s price.
Residential propane prices averaged nearly $2.75 per gallon, more than 2 cents per gallon above last week’s price and more than 55 cents per gallon above last year’s price. Wholesale propane prices averaged almost $1.39 per gallon, nearly 4 cents per gallon above last week’s price and more than 37 cents per gallon above last year’s price.
Propane/propylene inventories decline
U.S. propane/propylene stocks decreased by 4.6 million barrels last week to 54.1 million barrels as of January 21, 2022, 5.5 million barrels (9.3%) less than the five-year (2017-2021) average inventory levels for this same time of year. Gulf Coast, Midwest, and East Coast inventories decreased by 2.6 million barrels, 1.5 million barrels, and 0.5 million barrels, respectively, and Rocky Mountain/West Coast inventories decreased slightly, remaining virtually unchanged.