6/4/23: Is History Telling Us Something?

You will see several arrows on that chart. We will use those as placeholders for the following narrative.

RED ARROW: In April of 2009, TET’s average was $.6379, while Conway’s July average was $.6260. By May of 2011, Conway’s average had shot up to $1.4174, with TET at $1.5166, a roughly two-year span.

YELLOW ARROW: In June of 2012, Conway’s average was $.5360 with TET at $.7828 (that was a $.2500/cpg North/South spread!). By the end of January 2014, Conway’s average was $2.12 with TET at $1.45 in February of 2014. That was an 18-month span.

PURPLE ARROW: In August of 2015, Conway’s average was $.3292, with TET at $.3741. By the end of November 2017, Conway’s average had ballooned to $.9305, with TET at $1.0587 in September of 2018, or a period of roughly three years.

GREEN ARROW: In August of 2019, Conway’s average was $.3320, while TET was at $.4191. A little over two years later, in October of 2021, Conway was at $1.4498, with TET at $1.4456.

BLUE ARROW: This is right now. Conway’s average price in May was $.6388, and TET was $.6506.

We have all been around the block a time or two in this industry, and we understand that markets vacillate back and forth between periods of higher inventories/lower prices and lower inventories/higher prices. This is how free markets react relative to basic supply and demand.

We also know that no period of time is the same as another, as there are so many macro-level market factors that impact the price of propane that have nothing to do with propane. However, propane’s fundamentals are typically the best place to start because if propane’s fundamentals are weak and macroeconomic drivers are weak, crude oil’s fundamentals stand a decent chance to be weak, which often compounds propane’s weakness. The inverse of that statement is also true; if propane’s fundamentals are bullish, and macroeconomic drivers are also bullish, it stands to reason that propane prices will be on the move higher.

The years I highlighted above each had their own macroeconomic factors at play, but also aspects relative to propane’s fundamentals that seem fairly straightforward in hindsight.

The period around July of 2009 was on the heels of an elevated global crude oil price spike and before the dawn of the Shale Era…then the economic crash happened in late 2008, and energy commodity prices began a rather precipitous drop. Production gets shut in during a low-price environment, essentially the fuel for the next price run-up, which happened about two years later.

The period around June of 2012 was a more typical nadir of price, as prices have difficulty staying at the extremes. Eighteen months later, fuelled by a perfect storm of conditions in the fall of 2013, then peaking with historic cold on top of low inventory levels, prices in Conway went to their highest levels in history.

The period around August of 2015 saw propane values in the high $.2000’s and low $.3000’s, and this was due to OPEC deciding it didn’t like American Shale Producers bringing so much product to the market, essentially lessening the United States’ appetition for Saudi Oil. The cartel believed it could win a price war, so they flooded the global markets with crude oil. It didn’t work well for them, as American ingenuity brought about the second act of the Shale Era with new drilling techniques. While several companies did not survive that price war, those that did survive became more efficient. OPEC relented; they cut production globally, which led to TET values topping $1.00 in the fall of 2018.

In October 2018, just before the midterm elections in the USA, the world learned of a private arrangement between the USA, the Saudi, and Russia, where the latter two producing nations agreed to pump more oil to the world. Prices fell off a cliff, bottoming out in August of 2019 at Conway with a monthly average of $.3320 ($.4191 at TET for the same month) before peaking roughly two years later in October of 2021 with an average of $1.4498 at Conway and $1.4456 at TET.

Conway prices stayed over $1.00 for 15 straight months after that, 14 straight months at TET.

So here we are in June of 2023. Propane prices, by and large, have been falling steadily since March of 2022 relative to the monthly average. Last month’s averages were below $.6400 in Conway and right at $.6500 at TET.

The global macroeconomic backdrop is clear as mud right now. Russia continues to fight an unjust war against Ukraine, and there appears to be infighting between Russia and OPEC, and the global economy is on shaky footing, but OPEC+ just decided on a significant production cut of 1M/bbls per month that will be borne by the Saudi’s alone. This is despite many experts believing that the global supply and demand balance for crude oil will see us in a deficit by the end of 2023, and that was BEFORE the announced OPEC+ (Saudi) cut of 1M/bbls we learned about on Sunday.

The Saudis typically get what they want and want higher prices, even if it means they have to do the heavy lifting in the short term. They are not in the habit of giving away money, so they believe that this strategy is going to bring about higher prices and more money for them in the long term once things swing back around to the other side of the supply and demand wheel…which, they always do, it’s just a matter of timing.