Frac Spread: As Autumn Begins, NGL Prices Fall

Considering that natural gas prices have tumbled off a cliff, NGL are holding up relatively well.

Hart Energy’s hypothetical NGL barrel dropped 6.5% in the last week at Mont Belvieu, Texas, and 4.4% at Conway, Kan. The barrels are calculated on a five-day average from Wednesday to Tuesday.

The hub price at the Houston Ship Channel fell 15.6% from the first day of the period, Wednesday, Oct. 26, to Tuesday, Nov. 1. That price is used to determine the frac spread for Mont Belvieu. The price at Chicago Citygate, used for Conway, fell 19.4%.

Since Oct. 18, the price at both hubs has dropped 30%.

Behind the falloff is the sliding price of oil, which has stumbled from the $50s to the mid-$40s per barrel. This stems from traders’ lack of confidence that an inherently dysfunctional OPEC can maintain lower production to support a higher price for oil, En*Vantage said. The other reason is the recent unseasonably warm weather, the analysts said. This is despite expectations for a cold three-month stretch from December through February.

Ethane prices are also down 11% in the last two weeks at Mont Belvieu and almost 7% at Conway. En*Vantage attributes weakness in ethane to warm weather-induced lower gas prices and higher than normal stocks of ethylene, and notes that the surge in demand from ethane crackers is not expected until mid-2017.

Brightening the picture are ethane margins, which widened considerably at both hubs in a week when other NGL scuffled. Looking ahead, En*Vantage expects volatility in ethane prices until significant demand begins to take effect in about eight months.

From a longer perspective, the recently ended month provided happy numbers. Indeed, the post-Halloween sugar high had barely eased before an early holiday gift arrived: a banner autumn for NGL prices, with the hypothetical barrel up 24.5% on average for September-October at Mont Belvieu compared to July-August, and up 29.2% at Conway.

The barrels’ margins weren’t bad either, rising 47% at Mont Belvieu and 61% at Conway as price hikes in propane and isobutane outpaced moderate rises in natural gas at the Houston Ship Channel and Chicago Citygate hubs.

Compared to last year at this time, the good news holds up. Mont Belvieu’s September-October 2016 barrel beat its counterpart from 2015 by 23%, and Conway’s 2016 barrel was 24% ahead.

The difference between the average NGL barrel price for the two-month period is almost indistinguishable from the price for the first 10 months of the year as a whole. Mont Belvieu’s September-October barrel price is just 15 cents behind the year-to-date price and Conway’s is just 1 cent below.

The oddity is explained by the dramatic increase in the prices of propane, butane and isobutane, beginning in September and lasting through most of October. Balancing that is C₅₊, which has been relatively more stable, and ethane, which is still experiencing low prices despite its October rally.

The average price of ethane shot up at both hubs in the September-October period compared to July-August. At Mont Belvieu, the increase was 40.3%. At Conway, the rise was 34%.

Average margins on ethane, negative until October, were slender yet positive for the two-month period. Propane margins, however, more than doubled.

Mont Belvieu’s propane price rose more than 28% during the period and Conway’s price jumped more than 42%. That led to a margin widening of more than 60% at Mont Belvieu and about 116% at Conway.

This stems from a burgeoning of propane exports as numerous new facilities open in North America to meet foreign demand.

Butane enjoyed a similar run during the period, rolling up a 30% price gain at Mont Belvieu and a 36% increase at Conway. Margins widened by 57% at Mont Belvieu and 72% at Conway.

The average increase for isobutane at Mont Belvieu was 34%, mostly in a swift October rise. Conway posted a 31% increase with margins increasing more than 50% at both hubs.

The price movement for pentanes-plus was more subdued—a 10% gain at Mont Belvieu and 15% at Conway. The average margin increased by 13% at Mont Belvieu and about 20% at Conway.

Storage of natural gas in the Lower 48 rose by 54 billion cubic feet (Bcf) in the week ended Oct. 28, the U.S. Energy Information Administration reported. The increase, shy of the Bloomberg median estimate of 57 Bcf, results in a total of 3.963 Tcf. That’s a 1.2% increase over the 3.915 Tcf total at this time in 2015 and 4.6% above the five-year average of 3.79 Tcf.

How NGL prices finish the year will likely depend to a large extent on the weather. If the Northeast and Midwest experience low temperatures, as expected, the price of natural gas and NGL will rise. If cold weather strikes Europe and Asia as well, prices could rise by a lot.

Joseph Markman can be reached at jmarkman@hartenergy.com and @JHMarkman.