Frac Spread: Midwest Propane Price Responds To Cold, Crops

The price spread for propane between Mont Belvieu, Texas, and Conway, Kan., narrowed to less than half a cent per gallon (gal) last week as shrinking Midcontinent storage and high demand for the fuel to dry grain resulted in a shortage of supply in the region.

Conway propane has trended steadily higher since mid-August and is now 66.1% higher, which was the low for the year. At that time, the Mont Belvieu premium was about 8 cents/gal.

Primary storage levels for propane in the Midcontinent have declined, EnVantage Inc. said, but are still less than 6% below the levels of last year and the five-year average. It’s really more of a combination of factors that have tightened supply.

A late harvest has been complicated by ongoing colder than normal temperatures. That placed propane demand for home heating in competition with demand for grain drying and prompted Wisconsin Gov. Tony Evers to declare an energy emergency in late October. Another challenge: ONEOK’s propane pipeline has experienced outages and deliveries to Midwest customers have been almost two weeks behind.

The grain drying process prevents crops from spoilage during storage. Farmers have reported moisture levels between 18% and 30% and, while moisture requirements vary depending on the grain, the average optimum moisture level is about 15%. For example, the maximum short-term moisture level for corn is 15.5% while the long-term—more than six months—level is 13%, according to the North Dakota State University Extension Service.

EnVantage expects the crop-drying season to last at least six weeks and consume 7 million barrels to 9 million barrels of propane, or average daily demand of 160,000 to 200,000 barrels per day.

 Conway propane’s near-parity in price with Mont Belvieu won’t last.

“Long range weather forecasts by NOAA and the Weather Channel for the Midcontinent and Northeast are forecasting normal to above normal temperatures during the winter months,” EnVantage said. “Once crop-drying season tapers off by the end of this month, it is likely that Conway propane prices could return to a discount to Mont Belvieu rather quickly if the weather turns warmer than normal. Basically, whether Conway propane prices can remain strong relative to Mont Belvieu will depend on how the weather sorts out during the December-to-February time period.”

The hypothetical NGL barrel at Mont Belvieu hit a 25-week high last week while Conway’s barrel hit its highest point in 28 weeks. Butane was the main driver for both, with Conway’s price rising 15.3% in the last week and Mont Belvieu’s rising 6%. Seasonal gasoline blending, as well as exports, drove butane’s price hike above 70 cents/gal at both hubs, with Conway boasting a rare premium over Mont Belvieu.

The spread between normal butane and isobutane has narrowed considerably. In the five-day “week” ended Oct. 1, isobutane’s premium at Mont Belvieu was 28.46 cents/gal. In the last two weeks, that spread has shrunk to 13.65 cents/gal and 10.59 cents/gal last week.

In the week ended Nov. 8, storage of natural gas in the Lower 48 experienced an increase of 3 billion cubic feet (Bcf), the Energy Information Administration (EIA) reported. That compared to the Stratas Advisors expectation of a 3 Bcf withdrawal and the consensus expectation of a 3 Bcf build. The EIA figure resulted in a total of 3.732 trillion cubic feet (Tcf). That is 15.1% above the 3.241 Tcf figure at the same time in 2018 and 0.1% above the five-year average of 3.73 Tcf.