While seasonal increases are not unusual because of reduced demand resulting from warmer weather, the steady climb in inventory levels this year is more likely the result of increased production. Propane supply in the United States (the weekly refiner, blender, and gas plant net production of propane - including propylene - plus additional net inventories, minus net exports) averaged 1.24 million barrels per day for the third quarter, 13.4% more than third-quarter average demand. Third-quarter average weekly supply was 5.3% above second-quarter levels, despite an 8.0% quarter-on-quarter drop in the average weekly Mont Belvieu spot price. From January 2012 through July 2012, the United States exported an average of 0.16 million barrels per day, while importing an average of 0.13 million barrels per day. The United States has not been a net exporter of propane and propylene since the EIA and U.S. Bureau of the Census trade data series began in 1973.
The EIA says that propane can be separated from natural gas at natural gas processing plants, or from crude oil at refineries. The increased levels of propane production and supply and the resultant increase in inventory appears to be less in response to propane prices and more as a result of increased natural gas production. Propane is a byproduct of shale gas production at fields containing wet gas—or, a high volume of natural gas liquids (NGL)—such as the Eagle Ford play in south Texas, where operators target a combination of crude oil, condensate and NGL. The supply and inventory increases for propane are most likely driven by producers responding to lower natural gas prices by increasingly focusing their production on wet fields, which are more profitable right now than dry gas production. The Gulf Coast region (PADD 3) accounted for 60%, or 7.4 million barrels, of the 12.4 million barrel rise in third-quarter propane inventories, placing downward pressure on Mont Belvieu spot prices.