What Influences Propane Prices?

Propane prices are subject to a number of influences, some are common to all petroleum products and others are unique to propane.  Because propane is portable, it can serve many different markets, from fueling barbecue grills to producing petrochemicals.  The price of propane in these markets is influenced by many factors, including the prices of competing fuels in each market; the distance propane has to travel to reach a customer; and the volumes used by a customer.  More specifically, propane prices are affected by:

Crude Oil and Natural Gas Prices - Although propane is produced from both crude oil refining and natural gas processing, its price is influenced mainly by the cost of crude oil.  This is because propane competes mostly with crude oil-based fuels.


Supply/Demand Balance - Propane supply and demand is subject to changes in domestic production, weather and inventory levels, among other factors.  While propane production is not seasonal, residential demand is highly seasonal.  This imbalance causes inventories to be built up during the summer months when consumption is low and for inventories to be drawn down during the winter months when consumption is much higher.  When inventories of propane at the start of the winter heating season are low, chances increase that higher propane prices may occur during the winter season.  Colder-than-normal weather can put extra pressure on propane prices during the high demand winter season because there are no readily available sources of increased supply except for imports.  And imports may take several weeks to arrive, during which time larger-than-normal withdrawals from inventories may occur, sending prices upward.  Cold weather early in the heating season can cause higher prices sooner rather than later, since early inventory withdrawals affect supply availability for the rest of the winter.

Proximity of Supply - Due to transportation costs, customers farthest from the major supply sources, which are the Gulf Coast and the Midwest, will generally pay higher prices for propane.


Markets Served - Propane demand comes from several different markets that exhibit distinct patterns in response to the seasons and other influences.  Residential demand, for instance, depends on the weather, so prices tend to rise in the winter.  The petrochemical sector is more flexible in its need for propane and tends to buy it during the spring and summer, when prices decline.  If producers of petrochemicals should have to depart from this pattern for some reason, the coinciding demand could raise prices.  And when prices rise unexpectedly, as they do sometimes in the winter, petrochemical producers pull back, helping to ease prices.  Prices could also be driven up if agricultural sector demand for propane to dry crops remains high late into the fall, when residential demand begins to rise.

For a copy of Propane Prices, What Consumers Should Know , from which this information was excerpted, contact Jerry Loos in the Energy Office.

 

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