COLUMN-Need to dry damp corn sends U.S. propane prices climbing: Kemp
(The opinions expressed here are those of the author, a columnist for Reuters.)
By John Kemp
LONDON Dec 13 (Reuters) - Propane has been the best-performing part of the barrel this autumn thanks to a record-busting but damp corn harvest across the Midwest United States, which has sent demand from crop driers soaring.
In response, U.S. propane prices have firmed, which should eventually slow the rate of exports and rebuild stocks at home. Price increases have started to ripple out worldwide.
Last week, Wyoming became the latest state to declare an emergency due to propane shortages and ease rules restricting deliveries by truck.
NYMEX propane futures for December 2013 delivery have risen more than 40 percent since the beginning of August, while natural gas futures for delivery in January are up just 14 percent over the same period and crude prices also for January delivery have actually fallen.
Propane prices have pulled level with normally more-expensive butane for the first time in over four years (Chart 1).
"A record-setting corn harvest is currently underway in the United States," writes Alex Wood, an analyst at the U.S. Energy Information Administration (EIA).
"Corn must be dried to a 15 percent moisture content before it can be stored to avoid mould and other quality problems. Because propane is used for crop drying, a wet growing season in the Midwest combined with the largest corn yield in U.S. history has greatly increased the demand for propane," Wood explained in a thoughtful note published on the agency's website on Thursday.
"Thus far, Indiana, Iowa, Minnesota, Montana, Nebraska, South Dakota, and Wisconsin have declared states of emergency to allow for more delivery of propane throughout the Midwest."
Stocks of propane and propylene held in commercial storage across the region have fallen to less than 17 million barrels, well below the range of 21-28 million barrels which is normal at this time of year (Chart 2).
Shortages have pushed prices charged to end users over $2 a gallon in some of the worst-affected areas, like North Dakota.
Chart 1: link.reuters.com/har45v
Chart 2: link.reuters.com/kar45v
With most of the corn crop now harvested and dried, "the propane drying crisis of 2013 appears to be over," according to website AgWeek.
But the majority of the cold weather and the winter heating season is still to come, which should ensure that propane stocks will tighten further through January and February, and keep prices relatively high in the short term.
Propane is extensively used in the petrochemicals industry, mostly on the U.S. Gulf Coast, as well as for residential and commercial heating, grain drying and as an automotive fuel, where it is normally sold as liquefied petroleum gas (LPG).
Heating demand as well as grain drying is concentrated in the Midwest where many homes and farms are far from the gas grid.
Just under 6 million homes across the United States use LPG as their main form of heating (about 5 percent of the total). But almost 40 percent of LPG-heated homes are in the Midwest, according to the EIA.
LPG is the main-form of heating for 8 percent of Midwest homes, rising to 13 percent in Missouri and 17 per cent across Iowa, Minnesota and the Dakotas.
Demand is strongly seasonal. Deliveries to regional consumers rise from as little as 4 million gallons a day in May, June and July to peak in December and January, when daily sales can hit 20 million gallons - even more in a cold year - before tapering in February, March and April.
The United States has become a major exporter of propane as a result of the shale boom. In September, the latest month for which data is available, propane and propylene exports, mostly from the U.S. Gulf Coast, hit a record 10 million barrels, up from less than 1 million in the same month in 2008.
Domestic propane prices must rise to reverse the flow and keep more of that propane at home to halt the slide in stocks across the Midwest.
State governors in Indiana, Iowa, Minnesota, Montana, Nebraska, South Dakota, Wisconsin and Wyoming have all declared a state of emergency or issued some other form of executive order easing normal safety regulations on the hours that propane truckers can drive.
While many of these orders were restricted to the harvest season and have already expired, Minnesota's has been extended until Jan. 8.
Shortages have been worsened because the Cochin pipeline - which brings propane from Alberta in Canada to terminals in Minnesota, North Dakota, Iowa and Indiana as well as Ontario - is shut for three weeks between Nov. 27 and Dec. 17.
The shutdown is part of a project to reverse the flow on the pipeline which owners Kinder Morgan plan to complete by July 1, 2014.
In the meantime, rising prices in the United States are rippling out to export markets. More than a quarter of U.S. propane exports in September were delivered to the Netherlands, which is the major spot market for Northwest Europe, with most of the rest to Latin America and Japan.
But as the U.S. market has tightened, propane prices in Rotterdam for delivery in December have risen 28 percent since the start of October. Prices normally rise in the run up to the peak winter heating season in the northern hemisphere, but not usually this sharply.
Much of the supply concern is already priced in. But propane prices look set to remain firm for at least the first part of the winter as the U.S. struggles to slowdown in Midwest stocks, and are primed to spike further on any signs of a prolonged period of really cold weather. (Editing by Anthony Barker)