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Part 2 | Price Comparison - Propane Supply and Demand

Posted by James Callow on Fri, Sep 18, 2015 @ 09:55 AM

Propane_Demand_in_CanadaLast week we discussed how propane prices compare to electric and natural gas prices.  And part of the reason propane has become more competitive with other fuel sources is the abundant supply of propane available in North America. 

“Propane pricing has been, and is likely to be, more stable gasoline, diesel, and ethanol-blends well into the future.” – Fuel Price Stability, Propane Facts

Here’s a snapshot into propane inventory, propane supply in Canada, and some information on how propane prices are determined.

Propane Inventory

Canada is the 7th largest producer of propane in the world – in 2013, Canada produced 11 billion litres of propane! More than half of our propane is used domestically, and the remainder is exported.

The two main propane hubs in Canada are located in Edmonton, Alberta and Sarnia, Ontario.  Propane is extracted as a Natural Gas Liquid (NGL) mix and then sent to fractionation plants to be separated into individual products, including propane. This is why propane costs are often influenced by Natural Gas and Crude Oil prices.

How Are Propane Prices Determined? 

Propane prices are affected by supply and demand. This “balance” between supply and demand can be influenced by many factors including domestic production, weather and inventory levels.

There are two main types of propane purchases: retail and wholesale.  But to understand these types, we need to understand the propane “supply chain” that occurs in Canada. 

The Canadian Supply Chain is composed of three categories:

  1. Upstream producers separate propane from natural gas through processing and fractionation, or produce it as a by-product of crude oil refining.
  2. Midstream firms store large quantities of bulk propane for transport.
  3. Downstream distributions deliver propane to end users.

Retail propane purchases are made between a downstream distributor and an individual family or business. Wholesale purchases are often negotiated annual between upstream producers and their midstream and downstream customers. Negotiations often lead to discounts or premiums on wholesale prices, which are based on market forces. These discounts and negotiations can affect the price at which propane is sold to downstream distributors, and at the end of the supply chain, residential and commercial propane customers.

What Causes Propane Price Fluctuations?

Though propane production is not seasonal, residential propane use is seasonal. That’s why an unexpectedly cold winter, or even an unexpectedly warm winter, can affect the cost of propane.

This is why supply and demand largely influences propane price - demand is seasonal, causing an imbalance in supply - inventories are built up during the summer months when consumption is low and to prepare for higher consumption throughout the winter months. 

That’s why propane storage plays a significant role in price. If demand exceeds supply, there is the potential for a short-term price increase.  This can happen for two reasons ... low supply or high demand.

This situation is rare – with the exception of the temporary price increase in 2014, propane pricing typically remains stable.

Do Any Other Factors Affect Propane Price?

The Canadian propane industry is part of a North American Integrated NGL Market. Since Canadian propane exports represent a small portion of North American demand, Canada does not usually “set” the price.  In addition, an increase in exports through the NGL market may cause a decrease in Canadian supply.

Mont Belvieu, Texas, is a price reference point for the North American NGL markets since it is the largest consuming region.  Mont Belvieu is affected by petrochemical and export demand.

Sources:

National Energy Board
Canadian Propane Association

 

Interested in learning more about propane prices for your home, cottage or business?  Contact us today for a free quote:

 

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We Deliver Quality Propane and Provide Friendly Customer Service Throughout Central Ontario!

Budget Propane Ontario supplies bulk propane to residential, commercial, and construction sites in central Ontario. Call us to discuss your needs and to learn about the benefits of using propane. 1 888 405.7777.

 

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