Production and Weather Keep Natural Gas Prices Under $3 per MMBtu (Part 6 of 7)
(Continued from Part 5)
Natural gas liquids
Propane is a natural gas liquid (or NGL). NGLs are hydrocarbons in the same family of molecules as natural gas and crude oil. Other NGLs include ethane, butane, and pentane. Propane and ethane in particular are both important feedstocks for chemical plants. But around 5% of all American homes also use propane as a heating fuel. So it’s important for investors to monitor propane prices.
Propane prices and inventories
Propane prices depend on inventory, which in turn depends on the severity of the winter. Last winter, propane prices spiked as inventories in certain regions that desperately needed the fuel experienced a propane shortage on account of severe cold and a lack of transportation.
Last week, residential propane prices averaged just under ~$2.36 per gallon, which was ~1 cent per gallon lower than the week prior and 94 cents per gallon less than the price in the corresponding period last year.
Propane prices affect propane distributors such as Ferrellgas Partners (FGP), Suburban Propane (SPH), AmeriGas (APU), and NGL Partners (NGL). Most of these companies are components of the First Trust North American Energy Infrastructure Fund (EMLP). They make up ~3.5% of the ETF. Only NGL, however, is part of the Alerian MLP ETF (AMLP)—an ETF that consists of the top 25 US MLPs (master limited partnerships). NGL makes up 1.34% of AMLP.
So far this winter, prices are lower and also steadier, closer to ~$2.4 per gallon. This is mainly because of the comfortable inventory position in propane, which the chart below illustrates.
In the week ended February 27, US propane inventories decreased by 4.2 million barrels to 55.1 million barrels. As of today, propane inventories are 27.9 million barrels greater, or ~102.8% higher, than they were in the corresponding period last year.
Gulf Coast inventories decreased by 0.6 million barrels, while East Coast inventories decreased by 0.9 million barrels. Midwest inventories decreased by 2.5 million barrels while Rocky Mountain or West Coast inventories decreased by 0.2 million barrels.
Outlook for propane demand and prices
The US Energy Information Administration (or EIA), in its February STEO, predicts households in the Midwest this year will spend 35% less on propane than last winter. This is a result of prices being 27% lower than last winter.
The EIA expects households in the Northeast to spend 23% less, as prices are 17% lower than they were last winter.
Continue to Part 7
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