Frac Spread: Building The Floor

NGL prices continued to make small gains the second week of September as West Texas Intermediate (WTI) crude oil made similarly modest gains on the news that inventory levels decreased 2.1 million barrels (bbl). A turnaround may not be expected in the short-term, but slight improvements are likely to continue that will support WTI prices in their current $30/bbl to upper $40/bbl price range, according to En*Vantage.

“It appears that we are in a bottoming [out] process for oil prices and evidence continues to build that the fundamentals are slowly improving,” En*Vantage said in its Sept. 17 Weekly Energy Report. These fundamentals include global oil demand, which is expected to reach a five-year high this year, according to the International Energy Agency; U.S. production is falling; and there is further weakening of some of the lesser global producers, as well as funding shortfalls for Iraq to continue development of its southern oil fields.

While WTI prices showed limited strength, C5+ prices fell at both Conway and Mont Belvieu despite having the closest relationship with crude. The Conway price fell 4% to 95 cents per gallon (/gal), though this was its second-highest price in more than a month. The situation was the same at Mont Belvieu as C5+ was down 1% to 97 cents/gal, its second-highest price in a month. Though WTI is helping to pull C5+ prices up, the lack of production out of the Canadian oil sands is limiting diluent demand.

Ethane fundamentals are also improving as frac spread margins are hypothetically positive at Mont Belvieu and nearly positive at Conway due to stagnant gas prices. While gas prices can be expected to improve during the winter heating season, ethane prices are expected to begin to climb out of the sub-20 cents/gal level they have been trading at for the better part of a year.

According to En*Vantage, ethane balances will tighten in the next six months as new ethane cracking capacity is brought online along the Gulf Coast via expansions. The company anticipates ethane storage levels to fall to 10 million bbl in December, their lowest levels in a decade.

“If our forecast is correct then over the next six months it will become more difficult for ethylene producers to easily access incremental ethane supplies from commercial salt domes, meaning that some of the 500,000 to 600,000 bbl/d of ethane being rejected will have to be economically dispatched at prices that give producers in those regions the sufficient frac spread to recover ethane. The first processing regions to experience positive frac spreads will be on the Gulf Coast, followed by West Texas and some parts of the Midcontinent,” the company said.

On the flip side, propane inventory levels are expected to hit a record high of 96 million bbl in October. This is an extremely high storage overhang to work off with crop-drying demand expected to account for 3 million bbl and heating demand accounting for up to 30 million bbl. In addition, as noted last week, some customers are already buying supplies ahead of the demand seasons, so some of the expected demand has already been worked off the storage level. The good news is that new propane export capacity is coming online this season, though there isn’t a consensus on how high export demand will be this season.

Natural gas production is starting to level off, though still it remains very strong, according to Bentek. The company forecast that production in the lower 48 states averaged 72.1 billion cubic feet per day (Bcf/d) in August. This was essentially unchanged from July production levels. The bulk of this production is occurring in the Permian, which had 276 rigs active in August.

This increase is having a negative impact on gas prices, which fell 2% at both hubs. The positive takeaway for NGL producers is that it helped improve frac spread margins with only C5+ showing weakness in margin from the prior week.

However, the most valuable NGL to make at both hubs was still C5+ at 67 cents/gal at Conway and 68 cents/gal at Mont Belvieu. This was followed, in order, by isobutane at 34 cents/gal at Conway and 31 cents/gal at Mont Belvieu; butane at 24 cents/gal at Conway and 29 cents/gal at Mont Belvieu; propane at 19 cents/gal at Conway and 20 cents/gal at Mont Belvieu; and ethane at negative 1 cent/gal at Conway and 1 cent/gal at Mont Belvieu.

Natural gas storage injection levels were still high even as the shoulder season approached as the U.S. Energy Information Administration reported that storage rose by 73 Bcf to 3.334 trillion cubic feet (Tcf) the week of Sept. 11 from 3.261 Tcf the previous week. This was 16% higher than the 2.878 Tcf posted last year at the same time and 4% greater than the five-year average of 3.209 Tcf. Cooling demand should remain higher for late September as the National Weather Service is forecasting warmer-than-normal temperatures throughout the country.