High international demand and lower global supply contribute to rising propane prices
Since mid-September 2020, propane prices at Mont Belvieu, Texas, the main U.S. hydrocarbon gas liquids (HGL) hub, have increased 120%, from $0.51 per gallon (gal) in the week ending September 11, 2020, to $1.12/gal in the week ending September 10, 2021 (Figure 1). Current propane wholesale prices are at their highest weekly average levels since February 2014. The recent rise in U.S. propane prices has occurred at a time when U.S. propane production, which averaged 2.3 million barrels per day (b/d) from January to June, is significantly higher than average domestic consumption (we report consumption as product supplied).
The share of domestic demand relative to total U.S. propane supply has been decreasing steadily over time. In the first half of 2014, domestic consumption accounted for 83% of supply, but last year it accounted for 51% of total supply, indicating the export market is now a significant contributor to U.S. propane price formation. The United States exported an average of 1.3 million b/d of propane in the first half of 2021, a 230% increase from the first half of 2014.
Typically, propane prices rise during the winter heating season, when demand rises and propane inventories are drawn down. This year, however, prices have increased during the low-demand summer months, when inventories typically build, because of high international demand and lower global propane supply.
U.S. propane inventories normally build in advance of the heating season. Because of strong export demand and high margins in the petrochemical sector, inventories rose at a slower rate during the 2021 inventory-building season (April–September) than in prior seasons (Figure 2). Between the first week of April and the second week of September, U.S. propane stocks increased by 31.3 million barrels, 9.5 million barrels less than the five-year (2016–2020) average and the slowest pace since 2013.
The relatively low inventories for this time of year and continuing high export levels have contributed to U.S. propane prices rising in line with propane wholesale prices in overseas markets (Figure 3). U.S. propane exports now account for 50% of total domestic demand (domestic consumption plus exports), 14 percentage points higher than the share in 2016. U.S. propane production has increased 11% since 2016, and we forecast that exports will be 39% higher in 2021 than in 2016 in response to high international demand and lower global supply due to OPEC+ crude oil production cuts. The general imbalance between growing global propane demand and reduced global propane production has contributed to wholesale propane prices in East Asia rising 112% between the weeks ending September 11, 2020, and September 10, 2021, and by 119% in Northwest Europe during the same period.
U.S. imports of propane from Canada have also decreased this year, further contributing to lower stock builds and higher prices. Although total U.S. imports of propane decreased as domestic production rose, propane imports from Canada were relatively steady between 2016 and 2019, averaging 132,000 b/d. In 2020, however, propane imports from Canada, which primarily supply the Midwest (PADD 2), decreased, and propane imports were down 17% compared with the previous four years. As a result of two new export terminals in western Canada— Ridley Island and Prince Rupert—Canadian producers can now export propane to Pacific Basin markets by tanker rather than solely to the Midwest market by rail, a more expensive method of transportation. The only U.S. region importing more propane from Canada since 2016 is the U.S. West Coast (PADD 5), where it is re-exported at a propane export terminal in Ferndale, Washington, which ships about 30,000 b/d to countries in Asia and Latin America.
Fewer propane imports from Canada into the Midwest, as well as higher propane exports out of the United States, are leading to slow inventory builds in the Midwest, where the majority of propane-heated households are located. In the Midwest, propane imports from Canada averaged 47,000 b/d from 2016 to 2019 and had a larger drop in 2020 compared with the United States as a whole, decreasing 24%. Meanwhile, inventories in the Midwest drew down when the weather was coldest, January to March (Figure 5). With strong global demand pulling more propane from Canada and the United States into international markets, inventories in the Midwest have been below the five-year range since the week ending April 23, 2021. Slow inventory builds in the Midwest are contributing to the upward pressure on prices in the United States, as well as Conway, Kansas, a major propane trading hub in the Midwest, where prices have been above $1.00/gal since the week ending June 25, 2021.