As of September 2021, the price of a gallon of propane in the United States is currently up 158.66% for the year (2021), ending the historically low prices of 2019 and 2020. Propane prices fluctuate dramatically based on production supply and demand, and September’s price of $1.27 is midway between prices of $1.60 in mid-2011 and early 2014 and slightly above the $1.00 average of 2017 to 2019. When prices vary this significantly, it’s essential for propane distributors to keep a close watch on consumer trends and market pricing.
In the U.S., residential homeowners consume approximately 50% of the total propane consumption for heating in the colder winter months. In fact, about 6 million residents use propane for heating their homes, and another 6 million use the fuel to power other appliances such as stoves, fireplaces, and barbeques.
Experts forecast future demand for propane based on the National Oceanic and Atmospheric Administration’s (NOAA) weather forecast and the number of heating degree days (HDD’s) their data shows. In 2020, demand for propane dropped for several reasons, but a primary cause was simply warmer weather. In 2020, there were 9% fewer HDDs than in 2019. The U.S. Energy Information Administration (EIA) estimates an increase in HDDs by 5% in 2021 and 1% in 2022.
Coming out of a warmer winter than initially predicted and with 2021/2022 weather to only be modestly colder, why is the price of propane increasing so strongly?
Of course, propane production is feeling the exact effects of COVID-19 as many other production facilities worldwide. Unlike previous years, there isn’t a surplus of inventory on hand going into the winter months. Less inventory will increase prices.
However, another significant trend is demand from outside our borders: exports. For some time, domestic demand for propane has been relatively flat. Producers sought to sell surplus inventory by building the export market, which they did very well. Distribution limitations constrained them at the docks, so overall prices remained healthy but reasonable for consumers. That is, until distribution channels caught up.
International buyers of propane wanted to get their hands on more of the product, and companies made investments to increase the capacity from U.S. docks to be able to ship it out. Now, the export market has almost as much demand for U.S. propane as domestic customers.
In 2020, the pandemic created chaos in the propane industry. Exports took a short drop, but demand returned to pre-pandemic levels much faster than anticipated. Meanwhile, our production capacities were restrained due to COVID, so surpluses diminished. By July 2021, exports are still strong, but production is only slightly back to normal levels. As a result, we’re headed into the winter months with fewer reserves of fuel than before. Thus, prices are soaring.
What does this mean for your business?
Rusty Braziel, Founder and Executive Chairman of RBN Energy, had this to say about the trend: “Assuming crude oil prices don’t fall off a cliff, how high could propane prices go? Hard to say.”
What is clear is that propane distributors will need to maximize every dollar between wholesale and retail prices, making supplier costing management more critical than ever.
How can you maximize your margin?
WEnd Consulting works with businesses throughout the country to evaluate their current business processes and discover tools and resources that help them achieve their financial goals. Our team members bring decades of industry experience to the table as we work with business leaders to select the best technology to achieve operational efficiencies; outsource servicing of routine operations; provide advisory services for mergers, acquisitions, and site selection; and provide general business support and consulting to guide strategies to success. Contact our team at WEnd Consulting today, and let’s talk about how we can help you achieve your goals.