November 18, 2009
Some Midwest Pipelines Still Flowing Propane Without Distribution

The horror stories of propane supply tightness in the Midwest seem to be worse in word than in reality.
  
Make no mistake, propane supplies are tight through the Corn Belt and really tight in some states. The culprit is a wet corn crop that has stoked demand for the heating fuel used in mechanical crop dryers. And some pipelines got overwhelmed by the surge in demand and started clamping down on terminal liftings. Meanwhile, truckers seeing long lines at the pipelines have been roaming far afield to pick up loads. They have sometimes crossed as many as two state borders to pick up propane.
  
For a while in November, both the West and East legs of the MAPCO pipeline were restricting the amount of propane shippers could pull from terminals. But, earlier this week, MAPCO started to ease these restrictions at a couple of terminals along the West Leg.
  
Other pipelines have been monitoring their volumes and demand, but have not imposed allocations. The NuStar pipeline, which originates in Kansas and ends in North Dakota, earlier this month announced plans to allocate liftings. But just days before the restrictions were to take effect they were canceled. The Oneok North System, which serves Kansas, Iowa, Nebraska, Missouri and Illinois, has never imposed lifting restrictions on propane shippers.
  
Rainy weather across the Corn Belt during the fall delayed farmers' ability to get into the field. Consequently, when they manage to get some clear weather, they are harvesting corn that is too wet to be accepted by grain elevators. In order for it to meet elevator needs, the grain needs to be put into propane-fueled dryers. As those dryers fired up, propane distributors have rushed transport trucks to pipeline terminals to pick up loads.
  
The demand for propane hit fast and hard. So far, the supply pinch has been particularly acute in Iowa, Minnesota and Illinois, said one propane distributor. Pipeline terminals saw local stocks quickly drained yet the trucks kept lining up. Once a terminal's local supply has been exhausted, the truck loading rate slows dramatically. The trucks can be filled only at the rate that propane moves along the line. That's a slower rate than just filling trucks from local tanks.
  
Local propane prices have spiked in some cases. The rise in local propane prices seems to be more a reaction to the tight supply situation and added transportation costs rather than manipulation, say propane distributors.
  
Because lines have been so long at terminals, propane distributors have been sending transport trucks a state or two away to pick up loads. It can be quicker and cheaper to send an empty truck an extra hour or two from Iowa to Missouri, for instance, rather than wait hours in line at a terminal.
  
But the government is also keeping a heightened watch on things. Acknowledging the market is facing some extreme conditions, Senator Chuck Grassley (R-Iowa) has asked the Federal Trade Commission to watch for signs of anti-competitive behavior among propane suppliers.
  
Grassley sent a letter to Federal Trade Commission Chairman Jon Leibowitz late last week, asking for the increased scrutiny of the propane markets.
  
Grassley wrote to Leibowitz, "I'm ... aware that propane inventories nationally remain at or above the five-year average for this time of year.
  
"I request that your Commission remain vigilant in overseeing the propane market to prevent anti-competitive behavior or any manipulation, and ensure that any shortages are not created artificially. I look forward to hearing the results of your review of the propane market in the Midwest."
  
Propane marketers say that the supply tightness and price strength are reflective of extreme market conditions. It has been years since the Midwest has seen a significant crop-drying season. When the pipelines have a chance to catch up and there are more reports that truck lines are shrinking, the local prices will retreat. That said, given the delay to the harvest and the wetness of the crop, propane dealers are expecting that crop-drying demand will continue well into December.

  

November 17, 2009
Propane Looking More Attractive as Cracking Stock for Petrochemical Companies

Propane is gaining appeal as a cracking stock for petrochemical companies given the narrowing spread between spot propane and purity ethane prices of late. This week saw front-month spreads between propane and ethane come in at least 12cts since last month.
  
In late October, the spread between the two peaked at 49cts, but it slipped to under 37cts on Tuesday, dramatically improving propane versus ethane as a cracking stock, said a source.
  
The shift suggests that although ethane will remain the preferred feedstock, and a few U.S. petrochemical plants have gone on to develop capability to crack more ethane, on a short-term basis "propane will be more preferred by some petrochemicals," the source said.
  
Front-month Mt. Belvieu propane prices were last assessed at $1.05375/gal while purity ethane was called 68.5cts/gal.

November 9, 2009
NuStar to Begin Allocating Propane Shipments Starting Nov. 13

The strong demand for propane for crop drying in the Midwest has propane dealers rushing to pipeline terminals to pick up the heating fuel. But the demand has been
so strong that it is overwhelming pipelines, and now two are imposing restrictions
on shippers.
  
NuStar Pipeline is the latest pipeline to announce (on Friday) that it was allocating the amount of propane shippers could push through their system. The MAPCO pipeline imposed allocation on its West Leg a week ago Tuesday.
  
In a notice to shippers, NuStar said "a record-setting corn drying season has quickly depleted our system inventories and liftings have outpaced pipeline throughputs."
  
NuStar will start allocating shipments on its East System starting Nov. 13. That system stretches from Kansas to North Dakota. The allocation is based on the six-month rolling average of terminal loading rack history at each terminal, the pipeline said. Allocation percentages will be recalculated monthly and the pipeline will contact individual shippers with their allocations.
  
To get a sense of how dire the propane supply situation has been, one Iowa-based marketer noted that he has been sending propane transport trucks to Minnesota and Kansas due to tight supply locally.
  
"With the allocation, marketers are having to go some distance to get loads, or corn driers will have to shut down," he said.

November 6, 2009
NYMEX NGL Swaps Seeing Strong Volume on First Birthday

Commodity exchanges are always looking for "home run" contracts -- those products that from the first day of trading see strong volume and that, without looking back, continually get stronger.
  
The Chicago Mercantile Exchange's S&P 500 stock index futures, launched in the 1980s, was one of those contracts. So was the New York Mercantile Exchange's crude oil futures. Most recently and on a smaller scale, NYMEX's Clearport-based NGL Swaps, launched a year ago, seem to fit that bill.
  
On Nov. 3, 2008, Clearport began clearing NGL swaps on Mt. Belvieu ethane, normal butane, isobutane and natural gasoline and Conway propane. Swaps on Mt. Belvieu propane were launched in July 2007. All were based on an OPIS index settled price.
  
The NYMEX launch could not have come at a better time, notes Alexandra Siff, manager, crude and refined oil products, at NYMEX, a division of the CME Group. "It just happened to be perfect timing that our launch came when the markets froze up," she said.
  
Indeed, the gas liquids markets desperately needed the swaps. At the time, the U.S. and global credit markets were virtually frozen in the wake of the meltdown of Lehman Brothers and following the bailouts of AIG and Freddie Mac and Fannie Mae. The over-the-counter gas liquids markets, which rely on credit to keep liquid, were almost at a standstill. Trust among trading firms, especially banks, was very low, and firms were demanding strict letters of credit. Some firms were being forced to pay off-market prices in order to get deals done.
  
Using a NYMEX NGL swaps eliminated the counter-party credit market risk, as the contracts were guaranteed by the exchange clearing house. Firms needed to have clearing accounts with the exchange clearing house, but as long as they met their margin commitments, they could trade. And the clearing house stood between the counterparties.
  
"We've used (the swaps) mostly in dealing with some of the smaller firms out there," said one trader. "Considering the credit risk you run, it's a very effective tool for lessening that risk."
  
The exchange had little idea whether the new contracts would fly or flop.
  
"I did not have a belief in them," said one NGL trader.
  
The exchange did not have the best track record in the NGL field. A pit- traded propane futures contract had languished for years.
  
But, traders quickly took to the new swaps, and the competing International Commodity Exchange soon launched its own swaps a few weeks later. But, the NYMEX had first mover advantage. A year after the contracts were launched, the NYMEX was seeing strong volume in ethane, normal butane and propane swaps.
  
"We were totally taken by surprise" at the contracts' success, Siff said.
  
One trader said the Clearport swaps provided the secure, liquid market that traders needed. "We are getting more paper done because of Clearport," he said.
  
In October 2009, 5,180 ethane swaps were cleared by Clearport. The exchange saw 911 natural gasoline swaps trade and 548 propane swaps. At month end, open interest stood at 15,035 positions for ethane swaps. Normal butane swaps had open interest of 13,169 positions for the month.
  
The November 2008 launch opened the door for a flurry of subsequent product launches. Since then, the exchange has launched balance-of-month swaps, which let traders exchange fixed and floating price positions for less than a month. It rolled out futures on the swaps, and options on the futures. The exchange realized that the original four-decimal pricing of the swaps was not common industry practice, and it rolled out new contracts that traded with five decimals after the decimal point.
  
And much of the swap activity has been migrating from the original four- decimal contracts to the five-decimal contracts. In October, 9,601 five- decimal ethane swap trades were cleared as well as more than 7,300 five- decimal normal butane swaps. Also, 13,605 five-decimal propane swap deals were cleared. At month end, open interest for five-decimal ethane swaps stood at 7,089 positions. Open interest for five-decimal propane swaps stood at 18,697 positions.
  
Further, the exchange has offered contracts covering more products in Conway and NGLs traded internationally.
  
The latest offering was of physically-cleared NGL trades. Over the past few months "we have seen a big pick-up of trading, not only the cash-settled swaps, but also the physical NGLs," said Daniel Brusstar, director of energy research at NYMEX.

One trader notes that the physically-cleared NGLs are still gaining their feet. "The physicals have not taken off yet, but they will," he said.