Frac Spread: Headwinds Continue To Trouble Ethane Prices

As July draws to a close, ethane prices remain in free fall with major headwinds working against them, primarily in the form of plant outages that have severely reduced domestic cracking capacity. This has resulted in widespread rejection throughout the country and could slow a price recovery that had been projected to begin this fall. However, it is likely that prices will experience a spike once cracking capacity comes back online.

The Conway price took the largest hit of any NGL the week of July 16 as it fell 12% to 18 cents per gallon (/gal). This was the lowest it had been since it was 13 cents/gal the last week of January. The Mont Belvieu price didn’t fare much better as it experienced a 9% decrease to 23 cents/gal, its lowest price since the week of Jan. 9, 2013, when it was 22 cents/gal.

Over the past several weeks, ethylene prices have increased dramatically due to these plant outages with extremely attractive margins of more than 50 cents/gal compared to ethane margins that remain markedly negative.

Propane prices continue to hold firm as volumes have been leaving the oversaturated Gulf Coast market and finding homes in the Midcontinent and Northeast via Enterprise Products Partners LP’s TEPPCO Pipeline. The Mont Belvieu price improved very slightly to $1.04/gal while the Conway price rose 1 cent/gal to $1.07/gal.

Additionally, PIRA Energy Group reported that LPG exports to Europe have increased. “Tightness in LPG supplies in Europe, particularly in butane, had price bids up this week. European supply has tightened considerably on lower export volumes out of Russia, and refinery maintenance in Antwerp, Belgium, and the U.K. Russian maintenance at gas processing plants has lowered prompt Russian output,” the firm said in its Weekly Oil Market Recap report for July 20.

This has helped make up for a marginal downturn in domestic butane demand with prices falling 1% to $1.24/gal at Mont Belvieu and $1.23/gal at Conway. Butane’s sister product isobutane also experienced slight price decreases, although refinery demand for alkylates remains strong with the Conway price down 1% to $1.44/gal and the Mont Belvieu remaining essentially unchanged at $1.31/gal.

The lone NGL to experience a price improvement was Mont Belvieu C₅₊, which follows increases in crude oil that are being caused by record high refinery crude runs. The price rose 1% to $2.19/gal, its highest price in a month. However, Conway prices were down 1% to $2.18/gal, their lowest level since the first week of June.

The theoretical NGL barrel (bbl) price fell 1% at both hubs with the Conway price down to $40.77/bbl with stable margins of $27.15/bbl. The Mont Belvieu price fell to $40.72/bbl with a 2% gain in margin to $26.76/bbl.

The most profitable NGL to make at both hubs remained C₅₊ at $1.77/gal. This was followed, in order, by isobutane at $1.07/gal at Conway and 93 cents/gal at Mont Belvieu; butane at 85 cents/gal at Conway and 84 cents/gal at Mont Belvieu; propane at 72 cents/gal at Conway and 69 cents/gal at Mont Belvieu; and ethane at negative 7 cents/gal at Conway and negative 3 cents/gal at Mont Belvieu.

Natural gas storage levels are growing at a strong rate this summer as the Energy Information Administration (EIA) reported a 90 billion cubic feet injection for the week of July 18, the most recent information available. This increased the storage level to 2.219 trillion cubic feet (Tcf) from 2.129 Tcf the previous week. This was 20% below the 2.78 Tcf figure posted last year at the same time and 24% below the five-year average of 2.902 Tcf.

EIA is projecting a record level of injection this season with close to 2.6 Tcf of gas being put into storage this summer as a result of increased production and the mild summer temperatures this season. This is expected to close the gap on the deficit compared to the five-year average.

“We’re projecting a normal winter with an anticipated 3.431 Tcf heading into the 2014 to 2015 winter heating season and a projected 1.5 Tcf by the end of the season in March 2015,” Katherine Teller, EIA natural gas analyst, told Midstream Monitor. “We’re not expecting anything out of the ordinary, but weather is always the big unknown.”

This was obviously the case this past winter when a sustained period of frigid temperatures resulted in a sharp price spike for gas and propane prices along with large storage withdrawals. “There really wasn’t an expectation for that sort of weather because it’s so hard to project such extreme weather events. We definitely weren’t expecting the level of withdrawals that occurred,” she said. Similarly, should there be an increase in hot weather, the storage outlook could change. However, it is becoming less likely that could occur given the length of time left in the season, as EIA is anticipating about 80 Bcf per week in injection levels the rest of the season. So far the average injections have trended much higher of late, which has given a cushion for storage projections even if there are hotter-than-normal days in August.

As it is, the National Weather Service’s forecast for the week of July 30 anticipates colder-than-normal temperatures throughout most of the country with only the West Coast expected to experience greater cooling demand.