The midpoint of the year is a good time to reintroduce the Frac Spread, which appears bimonthly in print in Midstream Business and weekly online at MidstreamBusiness.com.

Though less colorful than that other midyear spectacular— July 4 fi reworks—at times NGL prices have been known to brighten the faces of traders. To be clear, the process used to produce the products discussed in this space is fractionation, not hydraulic fracturing; hence, we’re talking frac, as opposed to frack.

Specifi cally, we’re watching fi ve gas liquids—ethane, propane, butane, isobutane and C5+ (pentane+ or natural gasoline)—at the Mont Belvieu, Texas, and Conway, Kan., hubs. Most NGL in the U.S. are produced from natural gas processing, although about 20% are derived from crude oil refi ning.

In short, the Frac Spread itself is the measure of profi tability for gas plants. It shows the value of NGL as individual components vs. the value if not removed from the natural gas pipeline and sold as fuel.

Though ethane has struggled of late, in general, the individual NGL are more valuable on the market than on their own.

Daily prices from the two hubs are plugged into a spreadsheet, then averaged out over the week that starts on Wednesday and ends the following Tuesday. Those averages are then calculated to create the “price” of a hypothetical 42-gallon NGL barrel based on the share of the market claimed by each product. The chart you see with this story compares the average of May and June with the average in April.

Of course, this “barrel” does not exist. You can’t buy it in the marketplace, because recreating an NGL barrel would serve no practical purpose. However, it does serve as a useful tool to gauge the sector’s market performance.

So, how is the sector performing? Not bad, at least for the time being.

At the end of June, the barrel hit its highest point at Mont Belvieu since mid-May 2015, and the highest at Conway since late April 2015. U.S. gas prices enjoyed a strong rally, with the benchmark Henry Hub chasing $3 per MMBtu at the tail end of the second quarter.

Note that on the Frac Spread chart, the price of each component is listed along with the shrink. The shrink refers to the portion—in terms of price—that is lost as the liquids are subjected to the movement and high pressure of gathering and processing. The difference is the margin.

The margin is determined by the average price of the NGL barrel and the average price of natural gas during the week. Data is supplied by Bloomberg and the U.S. Energy Information Administration, which gathers its information from multiple sources.

June was 270.28% over the previous week. At Mont Belvieu, the rise was 59.72%.

On the table with this story, ethane retains its volatility, even when averaged over two months, but changes in the other NGL are less drastic.

The way market prices work is that crude oil sets the ceiling, natural gas sets the floor and NGL float in the middle. Whether prices continue on an upward trend depends on the market fundamentals of supply and demand. Supply is tightening and demand is growing, but the market remains out of balance for now.

Comments