Afternoon Propane Report 1.9.23

By: Peter Rowley, Risk Manager - Energy

Thu, 05 Jan 2023, 20:13

StoneX Daily Propane Market Report January 9th, 2022

Peter Rowley

Senior Risk Manager-Energy

Daily market recap : Propane climbs higher while wti pares gains

It was a strong showing for TET propane to start the week as the Feb23 contract steadily climbed over 2.50cpg higher and nearly touched 78cpg while WTI slid roughly $2/bbl from its opening high print of $76.74/bbl. TET traded from 76.00-77.75cpg with the closing prints near the highs of the day as Monday’s session erased nearly all of last week’s 3.00cpg losses. Conway traded in a 1.50cpg range from 75.5-77cpg as the 2^nd month N/S widened out to -50cpg and traded there roughly 100x throughout the session.

Near term spreads were pricing near unch but next winter saw the Q423/Q124 traded at parity for the first time since the end of November as that spread dipped as low as -.75cpg towards the end of December. But the bulk of the action in spreads came in cal24 as the largest gains were seen in the Q124/Q224 which traded as much as .75cpg higher at a 6.00cpg backwardation, the strongest for that specific spread since October when headline prices were trading in the 90s. This strength kept the furthest out expirys more stable as daily gains dwindled to just 1.25-1.50cpg from Q224 on out (fair value estimate).

propane market trend: Stuck in the middle with crude

The six-month TET Propane chart below shows rolling 2^nd month futures against a basket of Cal and Winter averages. Its pretty sobering looking at how much backwardation has come out and how coiled the curve has become as the most expensive part of the curve quickly flipped from prompt to next winter in mid-November when it become apparent supply risks were not in the cards for this winter. Its hard to derive some value at the back end of the curve for those long side hedgers as the cal25 strip has gained nearly 4.50cpg (75.375cpg) while the active 2^nd month futures contract has collapsed nearly 37cpg over the same six-month window.

The way I’m viewing it however is that the tail isn’t wagging the dog, as the Winter24-25 strip has remained range-bound between 75-85c over the past three months and could be viewed as opportunities to layer in purchases when prices get to that lower bound. The street remains overly bullish on crude (and propane by extension) for 2023 despite warmer weather which was echoed by Goldman Sachs latest research report that said warmer weather could cut oil demand by 1.5M b/d but improvements in China make it essentially zero-sum. At present, we are in a holding pattern as the first few weeks of the year are historically full of chop for risk assets and with WTI stuck below its 50dma (80.29) we seem to be stuck.

CFTC Cot data: funds continue to hold massive net short position

There were a few interesting points from this past week’s CFTC report as the data showed hedge funds reducing their length by 7% overall for the petroleum complex. Looking at the swap-dealer column we see their net long position across all products continuing to grow and showing the least short in nearly five years. Swaps-dealers are the proxy for OTC hedging and their positioning shows us that the market is running out of producer hedging programs, a bullish indicator.

On the propane front, it’s the same old story…large spec traders hate it. Hedge funds both closed out open long positions and opened fresh shorts and increased the overall net short position by 309kb (-6.6%), holding near the most bearish since my data goes back to (2008). It should be noted when positions get to one extreme or the other, it can be viewed as contrarian as “fresh powder” is no longer available. The timing is interesting however as funds sold into strength as the data for this report coincides with the 4.50cpg run-up in 2^nd month futs. It is also worth noting that this could be exaggerated as it also accounted for an expiration, but the trend is still overly bearish.

Energy

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