The Daley Note: August 18, 2023
US propane and propylene inventories have hit new five-year highs for 14 straight weeks and continue to put pressure on propane prices. The propane inventory glut is likely to accelerate plans by midstream companies to develop new export markets.
Propane prices are now down 20% YTD to $0.67/gal and trade at a measly 36% of WTI. The run-up in inventory started in July 2022 as ONEOK’s (OKE) Medford fractionator went down and fractionation capacity quickly became constrained. Weekly inventories from EIA include an estimate of propane blended into Y-grade, so although this propane could not be used, inventories started to climb. As new fractionation capacity comes online, that propane can be fractionated and sold, which has helped push down prices this year.
Although increasing NGL production and reduced fractionation capacity contributed to the initial run-up in storage, the mild winter is responsible for keeping inventory high. Propane stocks usually start to fall in late October as the heating season begins, but inventories in 4Q22 kept increasing through most of November (see figure). Domestic demand fell 25% for the 2022-23 heating season and is down 19% YTD vs 2022.
Exports have been able to offset lower demand, hitting record levels in June and 21% higher YTD vs 2022, which is keeping total demand flat Y-o-Y so far. However, East Daley’s NGL Purity Product Forecast shows plant production has increased 5% YTD vs 2022.
Exports could continue to tick up in 2H23 as more propane dehydrogenation (PDH) facilities come online in China. Energy Transfer (ET) and Enterprise Products (EPD) both reported 4-6 facilities have come online so far in 2023, and another 11-12 PHD facilities are expected to come online later this year. EPD noted these plants would have capacity to absorb ~250 Mb/d of propane, though the company only expects utilization to be 65-70% (160-175 Mb/d).
Both ET and EPD expect export demand will continue to grow and have announced expansions at their LPG export facilities. ET is spending $1.25B to add 250 Mb/d of capacity at its Nederland terminal, while EPD has announced a 120 Mb/d expansion at its Enterprise Hydrocarbons terminal and a “flex” 360 Mb/d propane export terminal at its new Beaumont site. The expansions are expected in 2025-26.
Although the long-term outlook for propane exports is strong, the market has a lot of inventory to absorb. Given how hot this summer has been, another mild winter could continue to keep propane inventories at record highs. Add continued NGL production growth, especially from the Permian as midstreamers add 2 Bcf/d of new gas processing capacity, and exports have a long way to go before bringing the propane markets back into balance. — Ajay Bakshani, CFA and Christina Adjiman Tickers: EPD, ET, OKE.
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