Robust production continues to bog down natural gas prices (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 are both important feedstock for chemical plants. About 5% of all American homes use propane as a heating fuel. It’s important for investors to monitor propane prices.
Propane prices and inventories
The price of propane depends 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 it experienced a propane shortage. The shortage was on account of severe cold and lack of transportation.
For the week ended March 6, residential propane prices averaged just under ~$2.36 per gallon. This was ~$0.01 per gallon lower than the week prior and $0.81 per gallon lower than the price in the corresponding period last year.
Propane prices affect propane distributors such as Ferrellgas Partners (FGP), Suburban Propane Partners (SPH), AmeriGas Partners (APU), and NGL Energy Partners (NGL). Most of these companies are components of the First Trust North American Energy Infrastructure Fund (EMLP) and make up ~3.5% of the ETF. Only NGL is part of the Alerian MLP ETF (AMLP), which consists of the top 25 US MLPs. NGL makes up 1.34% of AMLP.
So far this winter, prices are lower and 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 March 6, US propane inventories decreased by 1.3 million barrels to 53.7 million barrels. As of this date, propane inventories are 27.7 million barrels greater, or ~106.2% higher, than they were in the corresponding period last year.
Gulf Coast inventories increased by 1.5 million barrels, while East Coast, Midwest, and Rocky Mountain or West Coast inventories decreased by 0.3 million barrels, 2.5 million barrels, and 0.1 million barrels, respectively.
Outlook for propane demand and prices
The U.S. Energy Information Administration (or EIA) in its March Short-Term Energy Outlook (or STEO) expects that households in the Midwest this year will spend 32% less on propane than last winter. This is a result of prices that are 27% lower than last winter.
The EIA expects households in the Northeast to spend 18% less, as prices are 16% lower than they were last winter.
Continue to Part 7
Browse this series on Market Realist: