The spot propylene market has experienced periods of extreme price volatility during the past 3 years. During August 2014, spot refinery grade propylene prices were stable. However, the volatility returned by mid-September, and spot refinery grade propylene prices increased 25% in less than one month. This insight provides a look at the mechanics of the spot propylene market, supply\demand, and market dynamics that have resulted in a recent spike in price volatility in the US propylene market.
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There are three grades of spot propylene traded in the US:
There are 2 main differences between cleared and bilateral physical transactions:
1) Bilateral requires delivery agreed upon by the two companies and the credit risk is between the two companies. The majority of the Enterprise location transactions are in well as no pipeline movements are involved and title transfer takes place at the end of the month.
2) Cleared propylene trades are all CME financial futures contracts and do not allow for physical PGP delivery. The credit exposure is with the CME and you must have a CME account to clear a transaction. Due to CME regulations, the buyer and seller are anonymous to each other, both parties transact with the CME. Cleared PGP financial futures contract transactions had an increasing impact on the spot PGP physical market during 2014. These cleared PGP transactions also had an impact on the monthly contract PGP price negotiations and an increasing role in setting the shape of the PGP financial futures forward curve.
PetroChem Wire marks the Mont Belvieu Enterprise PGP storage curve each day at 3:00 pm CST based on actual transactions and the bid/ask broker markets that are available to market participants. The curve is then sent to the CME Settlement Team for the daily settlement PGP financial futures market and subsequent notification to CME accounts with their new margin account values based on each account holder’s market positions versus the settlements (also called Mark-to-Market).
As of early October, there are approximately 120 million pounds of financial PGP futures contracts open interest on the CME. The majority of the open interest in the contracts is concentrated in the Oct/Nov/Dec periods. 120 million pounds open interest in the financial PGP futures contract seems relatively high in a market that has days when no trades take place. A one cent/lb daily move in PGP prices changes the CME margin requirements for these participants by $1.2 million. The financial PGP futures contract has become an important part of the propylene market over the past year.