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High propane demand raises Midwest prices

– Midwest propane prices are higher than those on the Gulf Coast for the first time in three years as domestic demand competes with exports for supply.

The benchmark price in Kansas averaged 1.4 cents a gallon more than the Texas equivalent this month, the first premium since November 2010. Midwest stockpiles are the lowest for this time of year since 1996, curbing supply in a region that uses more of the fuel to heat homes than anywhere else in the U.S.

The country is shipping record levels of propane and propylene abroad, helping improve margins for producers while raising costs for farmers to dry their crops in an area that produces 32 percent of the world’s corn. Prices jumped 51 percent in the past year, illustrating a side effect of exports as shale drilling boosted production of natural gas liquids such as propane, as well as natural gas, to all-time highs.

“The demand for exports is pulling barrels to the coast and away from traditional U.S. markets,” said Anne Keller, manager of natural gas liquids research at Wood Mackenzie, an energy consulting company in Houston. “Our own residential market is bidding against markets somewhere else in world for these barrels.”

Propane in Conway, Kan., was 3 cents a gallon higher than in Mont Belvieu, Texas, on Nov. 7, the most since Feb. 16, 2010, according to data compiled by Bloomberg. Conway and Mont Belvieu are the two largest storage hubs for the fuel in the U.S. Propane at Conway sold at an average discount of 18.9 cents to Mont Belvieu in 2012. The price fell 2.5 cents to $1.1925 a gallon on Nov. 15 in Conway, or 0.75 cent more than in Texas.

Midwest prices have risen as new pipelines, including DCP Midstream Partners LP’s 175,000-barrels-a-day Southern Hills system, have allowed producers to ship more natural gas liquids, including propane and butane, from the middle of the U.S. to the Gulf Coast, where export docks and most of the country’s petrochemical plants are located.

NGLs, which are pumped from wells along with natural gas and separated at fractionation plants, are used as feedstock in petrochemical plants, diluent for heavy crude in pipelines and gasoline blending.

Oneok Inc. expects the expansion of its Sterling pipeline system that carries NGLs to the Gulf Coast from the Midcontinent to come online before the end of the year, said Terry Spencer, the company’s president.

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