With apologies to J.J. Cale...If you wanna hang out, you've got to take her out / Propane
If you wanna get down, down on the ground / Propane
Up in price, up in price, up in price / Propane
Carry the TorchThe price of NGLs is normally quite volatile, and both producers and consumers have developed hedging strategies to protect themselves as best as they can.
|A Tiger in the Tank
|Source: CRB Infotech|
But earthquake insurance is much cheaper in Chicago than it is in Los Angeles, and the cost of hedging any commodity that tripled in real-dollar prices between 1999 and 2001, then fell by half and redoubled again going into 2003, must reflect that volatility. Moreover, regardless of the price of propane at Mont Belvieu, Texas, the delivered price to users outside the Gulf Coast likely will reflect transportation costs more than material costs. As a result of this volatility/location combination, the New York Mercantile Exchange's propane futures contract has never had more than trivial volume. Hedging propane with natural gas -- a common technique known as cross-hedging -- doesn't solve the problem either. The relationship is decidedly non-linear, and for good reason: Much of the natural gas market is destined for non-interruptible uses, such as residential heating, and customers are decidedly not price-sensitive when the choice is pay more or freeze to death (sorry, commodities are not pretty). In addition, few residential customers have available storage in their backyards. Commercial propane use is more interruptible; the consumer can reduce demand in the face of higher prices. And many propane customers have storage tanks on site.