Cold Weather Could Result in Higher Propane Prices

Cold Weather Could Result in Higher Propane Prices

Tight supplies mean abnormal temperature lows could increase demand, price.

Propane prices have leveled of around $2 per gallon after a steady climb during the summer months. However, two factors could cause them to rise again, notes Paul Hammersmith, product manager for LP for Shelby Co-op, based in Shelbyville, Ind. This co-op supplies a large share of propane used in central and southern Indiana, parts of Ohio and a big chunk of Kentucky.

One of the causes could be an increase demand for grain drying, especially if it's above what those in the industry expect. That's possible, at least in some localities, because late planting has resulted in higher moisture corn, even though the corn has reached physiological maturity for the most part. In other words, it formed a black layer. It will dry down, but dry-down in the field can be slow except on bright, sunny days during this time of year.

The other big unknown is what the winter will be like. Colder-than- expected temperatures could cause a surge in demand for propane for home-heating use. The reason anything that spikes demand could quickly be reflected in prices is that supply of propane in the U.S. for domestic use is at its lowest level in five years, Hammersmith says. A sizable amount of production has been exported overseas. Buyers in other countries have been cashing in on the weakness of the U.S. dollar compared to other currencies.

Part of the volatility also stems from the same volatility that surrounds the stock market, the product manager says. Good economic news sends investors into a good state of mind, but when bad news comes out, they reverse their trends. The unstable economy in Europe adds to the variability in prices for many commodities, including crude oil. Currently, most propane is produced from crude oil.

Some weather forecasters are already calling for a rough winter. In fact, Greg Soulje, a Chicago-based private forecaster who makes predictions on a seasonal basis for Farm Progress publications, including Indiana Prairie Farmer, released his fall outlook a few weeks ago. He's looking at much below normal temperatures in parts of the Corn Belt, along with above- normal precipitation. Furthermore, he expects this trend to begin relatively early in the heating season. In fact, he expects mid-to-late fall to become colder and wetter than normal. If his predictions are fright and demand for home heating fuel goes up significantly, impacting an already tight supply, propane prices could rise, Hammersmith suggests.
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