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The Best Way to Play the Looming Propane Crunch

Commodities / Energy Resources Jul 15, 2014 - 06:55 PM GMT

By: Money_Morning

Commodities

Dr. Kent Moors writes: You may not realize this, but propane is about a lot more than just firing up the family grill.

In a very real sense, it’s the lifeblood of the entire rural lifestyle.

In the countryside, propane heats more than six million homes, fuels equipment and vehicle fleets, and is instrumental on farms for drying grain for storage and keeping livestock-filled barns warm in the winter.


But like any fuel, it’s susceptible to shortages that cause unwanted strain on entire rural communities, and decisively raises prices in supermarkets across the country.

The last of these rural “energy crunches” hit in January and February when farmers and rural households had to pay through the teeth just to keep warm.

Now, another tough winter for propane is already starting to take shape.

And while that would certainly not be welcomed in rural communities across the country, shortages like these do have the potential to create serious windfalls for investors.

One of them is with a company I have already recommended to my subscribers…

Setting the Stage for the Next Propane Crisis

Of course, this is not the first time I’ve written about propane. It’s an escalating situation I have covered in OEI for more than two years now.

Also known as autogas or liquefied petroleum gas (LPG), propane is a ready byproduct of the new oil and gas production renaissance in the U.S.

In this case, the problem isn’t the supply itself. Paradoxically, there is plenty of propane being produced. It’s even becoming one of the main export commodities from American refineries.

So why are we already worrying about another shortfall this winter?

It’s because the same combination of problems that caused the last crisis are happening again going into this winter.

First, exports continue to expand. LPG can readily be moved by tanker and is a direct way to offset energy constrictions from other sources. And, of course, foreign markets are only too ready to pay a hefty premium over the domestic price charged in the U.S., even if prices are advancing.

Second, there is the increasing problem of insufficient storage and terminal capacity to service several parts of the country. There are simply too few privately-run terminals and not enough incentives to release more fuel to the American market.

But the main problem these days is a lack of sufficient pipeline capacity to move the propane from where it’s processed to where it’s needed, setting the stage for a repeat of last year’s crisis.

From December to February, when winter temperatures plummeted to record lows across much of the country last year, residents in the Midwest and Northeast struggled to stay warm amid propane shortages and price spikes.

To avert what was fast becoming a crisis, more than 30 states declared emergencies and relaxed trucking regulations to ease propane deliveries from the Gulf Coast and elsewhere.

Due to the exorbitant prices, governments also rushed heating assistance money to consumers, and provided loans to propane distributors caught in a cash crunch. Propane dealers rationed the fuel, and, in an unprecedented step, the federal government ordered a pipeline company to give top priority to propane shipments to the Midwest.

It’s All About the Money

One reason companies proceeded with their exports and pipeline changes that left propane consumers vulnerable last winter is that producers of many critical commodities-including oil, natural gas, propane, gasoline, diesel, jet fuel, and heating oil-are not obliged to distribute those fuels in a way that benefits U.S. consumers.

If it’s more profitable for companies to sell those products overseas or reconfigure their pipelines, they will do so whenever possible.

In fact, critics claim that industry practices that boost profit at the expense of consumers can already be seen in the nation’s gasoline and diesel markets. In the case of these fuels, record export levels have helped keep U.S. fuel prices high even though there’s a glut of discounted crude oil in Texas, where refiners have been churning out products at high rates.

Meanwhile, the nation’s fuel inventories remain relatively lean, so problems with pipelines or refineries often produce fuel price spikes.

Even domestic natural gas, now being produced in records amounts, was in short supply throughout the Northeast because of strained pipeline capacity.

Now, no one has plans to build more pipeline capacity, because it would be unprofitable to do so. And storage facilities that were once adequate are less so now that there’s a nationwide shift to fueling power plants with natural gas.

The Four Factors That Drove the Last Crunch

So what were the events that led to last year’s crunch?

In March, Pulitzer Prize winning environmentalist publication InterClimate News laid out four reasons for the propane crisis:

Record propane exports. Propane production was exceeding the nation’s largely seasonal demand for the fuel, which sent producers on the hunt for new customers. They found plenty of them in Central and Latin America, as well as Asia, and that led to expanded export facilities in Texas. In 2013, propane exports rose more than 75 percent to a record 4.6 billion gallons, equal to more than 20 percent of U.S. production, according to the National Propane Gas Association (NPGA). Many companies have signed long-term export contracts that carry penalties for cancelled export shipments. Those overseas deliveries, which left the Midwest with unusually low inventories, continued at record levels long after several states had declared emergencies because of low propane supplies.

A bumper crop of wet corn. Coming off of several years of below normal grain production, Midwest farmers grew a record corn crop that got drenched by late rains. That delayed the fall harvest and caused corn-drying to consume nearly six times the amount of propane used in a normal year, according to the NPGA.

Sustained frigid weather. The Polar Vortex hit the country after a string of relatively mild winters, causing propane use to jump dramatically everywhere except on the West Coast. The impact was magnified in the Midwest because supplies that were supposed to last the winter had already been severely depleted by the grain drying.

Pipeline company choices. Kinder Morgan Energy Partners, L.P. (NYSE: KMP) took its Cochin pipeline out of service for several weeks starting in late November, cutting off the flow of Canadian propane to the Upper Midwest at a critical time. That pipeline is being reversed later this year to carry fluids for diluting Canada’s thick tar sands oil. The move will boost profits for Kinder Morgan, but also will permanently eliminate pipeline capacity that delivered 50,000 barrels per day of propane, including 40 percent of Minnesota’s supplies. The company had said the line would remain in service until March. In addition, Enterprise Products Partners L.P. (NYSE: EPD) reversed one of its northbound pipelines, a change that forced more products to squeeze onto Enterprise’s TE Products pipeline system (TEPPCO), which continued carrying products north from Texas. Propane shippers suddenly had to compete for space on that pipeline against products displaced by the Enterprise reversal. Shifting more deliveries to railcars was tough amid the crush of oil now also traveling by railroad. In early February, the Federal Energy Regulatory Commission ordered Enterprise to temporarily give propane priority on its TE Products pipeline to ease supply shortages in the Midwest and Northeast.”

Here’s How to Play It

Of course, another frigid winter is at the whim of Mother Nature. But the other factors that were major contributors to the last crunch still exist.

One way to play this brewing crisis is with a company I recommended to Energy Inner Circle readers.

It’s a company called Methanex Corp. (NasdaqGS: MEOH) and it’s up 55.8% since recommendation.

Based in Vancouver, BC, Methanex is a producer/distributor of methanol, a liquid commodity chemical used in the production of many chemical derivatives. The need for methanol has expanded considerably, especially in view of the propane situation.

MEOH has major domestic and foreign market exposure and also controls much of the market purchases of methanol produced by other vendors. The company owns its own fleet of ocean tankers, and has a network of terminal and storage facilities worldwide.

As the next crisis looms, propane supply problems will continue to be a main catalyst for increasing methanol prices, driving this one even higher.

I’ll have more on this situation as it develops.

PS. It’s not all bad news in the nation’s heartland. Fifteen million people in 32 states are cashing in big time on America’s oil boom. Here’s a backdoor way for you to join them.

Source : http://oilandenergyinvestor.com/2014/07/best-way-play-looming-propane-crunch/

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