Midwest Propane Supply Tight

STREATOR, Ill. (DTN) -- The onset of severely cold weather in January spurred heavy demand for heating fuels, which triggered steep drawdowns in propane supply in the Midwest to a point that inventory is now extremely tight, the Energy Information Administration reported Thursday.

The spot price of propane at Conway, Kan., has spiked far above the Gulf Coast spot price at Mont Belvieu, Texas. By Jan. 21, wholesale prices at Conway had vaulted to a 95-cent-per-gallon premium to Mt. Belvieu. Conway spot propane jumped late Wednesday to $3.24 gallon, more than double the price at the Gulf Coast, spiking $1.50 in two days. The high propane prices in the Midwest are the result of both increased demand for space heating in the current cold weather that followed higher demand for crop drying in November.

The most recent cold weather increased space-heating demand at a time when markets were already tight. As demand outpaced supply, inventories dropped further, by 1.5 million barrels (bbl) and 1.2 million bbl for the weeks ending Dec. 6 and Jan. 3, respectively. Since the week ending Oct. 11, Midwest propane inventory levels have dropped 12.8 million bbl compared with a 7.3 million bbl decline for the previous five-year average for that period.

From early 2010 until November 2013, propane prices at Mt. Belvieu, the nation's largest propane storage and market hub, have been higher than at Conway by as much as 30 cents per gallon, prompting propane supplies to flow south on newly expanded southbound pipelines. High demand from the local petrochemicals industry and access to the global propane market via expanded hydrocarbon gas liquid export capacity supported higher Mt. Belvieu prices and encouraged propane from the Rockies, PADD 4, and elsewhere in the Midwest to flow south.

After the harvest in 2013, logistical problems prevented the Midwest region from fully replenishing inventories before the onset of winter. The upper Midwest is supplied with propane by the Enterprise Mid-American and ONEOK pipelines flowing north from Conway, home to 30% of the nation's propane storage, and the Cochin Pipeline moving product south from Canada, and from rail deliveries.

The Cochin Pipeline, which delivers ethane and propane from Canada to the upper Midwest, was out of service for maintenance from late November to Dec. 20 and unavailable to deliver supplies. Rail transportation disruptions due to weather and other factors curtailed deliveries from Mt. Belvieu and Conway, as well as from Canada.

Strong demand surges, low inventories and supply challenges have led several Midwest states to implement emergency measures to provide propane to heating customers, including suspensions of limitations on hours-of-service for propane-delivery truck drivers.

In the Midwest, propane is used for both drying agricultural crops and heating homes and businesses. For corn to be stored, it first needs to be dried, using large-scale heaters that often use propane for fuel. A late-2013 corn harvest, along with cold, wet weather resulted in strong demand for propane at distribution terminals in the upper Midwest. For the week ending Nov. 1, Midwest propane inventories dropped more than 2.0 million bbl, the largest single-week stock draw in any November since 1993. This demand prompted a strong upward price response, and propane at Conway moved to a 3.0-cent-per-gallon premium over Mt. Belvieu during the first week of November, the first such premium in almost three years.

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