Frac Spread: Economy Wobbles … Will It Fall Down?

Last week’s five-day average price of the Mont Belvieu, Texas, hypothetical NGL barrel dipped below $18 for the second time in eight weeks and only the third time in 40 months. Crude oil also buckled under the dual-stresses of higher-than-expected inventories and a weakening global economy.

The NGL barrel has been below $20 for eight of the last nine weeks and its most recent price of $17.98 was 1 cent below the $17.99 price for the week ending April 5, 2016. Third-quarter prices have mirrored those of March-April 2016, a time when the oil and gas industry struggled with low commodity prices.

Ominously, last week’s price of Mont Belvieu ethane, despite a 34% two-week rally, was below the lowest point in the 2014-2017 downcycle. Ethane and ethylene inventories remain high, and new crackers coming online won’t necessarily resolve the problem of a global economic downturn.

The price of West Texas Intermediate (WTI) crude oil dropped 3.3% on Aug. 14 following a report from the U.S. Energy Information Administration (EIA) that inventories were again rising, defying expectations. The price continued to fall in morning trading on Aug. 15. Crude in storage increased by 1.6 million barrels last week, compared to analyst expectations of a 2.8 million-barrel decrease. The total of 440.5 million barrels is 3% above the five-year average.

Also released on Aug. 14 was a report from the German government’s economic statistics agency that the country’s economy had contracted by 0.1% in the second quarter. The New York Times reported that analysts with Deutsche Bank said they expected Germany’s economy to continue to shrink in the third quarter, which would meet the definition of a recession.

China’s factory output in July was its slowest in 17 years, a sign that the country’s growth rate is slowing as its trade war with the U.S. continues. The tariff battle has unsettled Chinese consumers, who have held off on major purchases such as cars.

Volkswagen, Daimler and BMW are heavily dependent on automobile sales in China. As sales slip, the companies cut back production which leads to a cutback in purchases of auto components from European manufacturers in Italy, the Netherlands and Poland. Steelmakers also suffer in this environment.

And so, it spreads. China is the world’s No. 1 exporting country; Germany is No. 3. When those economies wobble, investors abandon stocks in favor of government bonds. On Aug. 14, the S&P 500 index took a hit of almost 3%.

When economies stop growing, so does demand for oil. When demand slows, prices drop.

The last time the Mont Belvieu barrel endured a price stretch like this, in April 2016, the average crude oil spot price—the equally weighted price of WTI, Brent and Dubai—was $40.75 a barrel. In the most recent month, July, the price was $61.48 per barrel so clearly, there is a ways to go.

Then again, the price is 15.4% below that of a year ago.

In the week ended Aug. 9, storage of natural gas in the Lower 48 experienced an increase of 49 billion cubic feet (Bcf), the Energy Information Administration (EIA) reported. Meanwhile, Stratas Advisors expected a 58 Bcf build and the Bloomberg consensus was 58 Bcf, as well. The EIA figure resulted in a total of 2.738 trillion cubic feet (Tcf). That is 15% above the 2.381 Tcf figure at the same time in 2018 and 3.9% below the five-year average of 2.849 Tcf.

Technical issues with Hart Energy’s data provider do not allow us to provide the price of ethane from Conway, Kan., for the last week of March because of a loss of pricing data for that time period. For the same reason, we cannot compare the price of the hypothetical Conway NGL barrel to the previous week. Conway ethane prices are not available for March 2019 and first-quarter 2019. We apologize for the inconvenience.