U.S. propane prices and crude oil prices re-link as exports increase
https://www.eia.gov/petroleum/weekly/ February 28, 2018
s the saying goes, eventually the solution to low prices is low prices. The U.S. propane market’s transition from balancing via imports to balancing via exports is a recent example. In 2017, U.S. propane exports averaged 905,000 barrels per day (b/d), a level high enough to balance U.S. propane markets and re-establish the link between U.S. and global propane prices (Figure 1). This change followed several years in which U.S. propane prices were significantly lower than elsewhere in the world because U.S. propane production had increased significantly, outpacing domestic demand and export capacity. Sustained lower propane prices in the U.S. encouraged investments to expand export capacity, leading to the eventual re-linkage of U.S. prices with global markets.
In the United States, propane is used mainly for space heating, as a feedstock for petrochemical plants, and, to a lesser extent, for agricultural applications and transportation. Propane’s use as a heating fuel results in a seasonal pattern in its consumption, peaking in the winter.
Until 2010, the United States had been a net propane importer. As a net importer, U.S. propane prices were linked with international propane prices, which in turn are linked with crude oil prices. Between 1993 and 2005, the U.S. propane price at Mont Belvieu, Texas, (the main U.S. propane trading hub for propane) averaged about 80% of the international crude oil price benchmark Brent on a dollar-per-barrel basis.
However, propane is produced from both crude oil and unprocessed natural gas production streams, so propane prices can be influenced by changes in both. Beginning in the mid-to-late 2000s, significant increases in U.S. natural gas production began to increase U.S. propane production. Before 2010, about 60% of U.S. propane production came from natural gas processing and 40% came from refineries. By 2016, the supply from increased natural gas production and processing represented almost 80% of total U.S. propane production. Between 2010 and 2017, U.S. propane production increased by 659,000 b/d to 1.5 million b/d.
The rapid increase in U.S. propane production swelled U.S. propane inventories to record highs and pressured U.S. propane prices, weakening the traditional link with crude oil. Between 2010 and 2015, Mont Belvieu propane prices averaged only 46% of Brent crude oil prices on a dollar-per-barrel basis. The weakened link between domestic propane prices and crude oil prices resulted in U.S. propane being priced between Brent crude oil and Henry Hub natural gas prices for the past several years when converted to the same basis.
Despite the rapid increase in U.S. propane production between 2010 and 2018, which resulted in lower domestic prices, domestic demand did not increase. Domestic consumption of propane as a percent of total domestic propane production has fallen since 2010, with peak consumption in winter remaining below total production in each of the past three winters (Figure 2).
Investments in petrochemical facilities that use propane as a feedstock, mainly in Asia and Europe, created an export outlet for U.S. propane supplies. This source of demand and others, combined with a large and sustained U.S. price discount to the international market, encouraged large investments in U.S. propane export capacity.
As a result of these investments, between 2010—when the United States became a net exporter of propane—and 2017, propane exports increased 796,000 b/d (730%). Data for 2017 indicate that the largest destinations for increased propane exports have been to petrochemical facilities in Asia, notably Japan, China, South Korea, and Singapore (Figure 3). In 2016, propane became the second-largest U.S. petroleum product export after distillate exports, surpassing motor gasoline.
The return of the international market’s role of balancing the U.S. propane market—originally through imports and now through exports—has resulted in U.S. propane prices re-linking with Brent crude oil and with international propane prices. Since late 2017, U.S. propane prices at Mont Belvieu have been more closely linked with crude oil prices—with U.S. propane prices averaging 62% of Brent crude oil prices in December. The difference between U.S. propane prices and the Saudi Aramco Contract price, the main international propane price benchmark, also narrowed from a discount of more than $1 per gallon (gal) in 2012 to an average discount of $0.13/gal in 2017 (Figure 4). Going forward, EIA expects this price spread to widen when U.S. markets become oversupplied or when international markets have increased demand for U.S. propane, and to narrow when U.S. demand for winter heating increases or international demand for propane declines.
