A new Star Wars trilogy hit theatres over the holiday season. The Force Awakens harkened back to the original, beloved trilogy from the late 1970s and early 1980s and not the prequels. That original trilogy began with a film called A New Hope, which was filled with a great deal of optimism.
It’s safe to say that if the current commodity market were anything like Star Wars it would be the second film in the trilogy, The Empire Strikes Back, which was a decidedly darker tale than the first.
Indeed, the 2015 holiday season introduced another series of lows for NGL and natural gas prices with several products reaching a new bottom. Though prices largely improved the final full week of 2015, it wasn’t a cause for celebration as frac spread margins continued to further decrease.
There are many reasons for the negative outlook for prices, but the primary one is that markets are oversupplied across the board. It is impossible for liquids, crude or gas prices to improve for very long because supplies are saturating each of these markets.
The one positive takeaway is that the old saying of low prices being the remedy for low prices is still true. There will come a point, likely in 2016, when prices reach a level that they create a market dynamic where demand exceeds supply for an extended period.
The question is when this occurs, which unfortunately is unlikely to be this winter given that there are less than three months left in the season.
This year’s El Nino is unlikely to cause a sustained cold front that will be necessary to work off the gas storage levels that have amassed this injection season, especially since injections ran longer with a mild fall.
Gasoline demand may increase with prices reaching their lowest levels in more than a decade, but the prospect of a glut of Iranian crude reaching the global market dims this outlook somewhat. There is a positive to the warm weather on this front as the lack of snowfall is likely to result in more driving demand throughout the season.
Though NGL prices have decoupled somewhat from crude and gas in the past decade, liquids prices still require improvements in both crude and gas markets to see major upticks. The most volatility is being experienced by ethane, which is being influenced by low natural gas prices and increased ethylene cracking competition from propane and butane due to lower prices for those products.
Mont Belvieu ethane improved 10% the week of Dec. 23, but was still had its second-lowest price of the year at 14 cents per gallon (/gal). The low for 2015 was experienced the prior week when the price was 13 cents/gal. These prices caused margins to turn negative for the first time in months. Conway ethane prices failed to experience an uptick the week of Dec. 23 from the previous week as it was down 3% to 11 cents/gal.
Propane prices still have a long way to go before the market returns to a more normalized state as storage is at record levels. Demand will pick up as Dow Chemical’s 750,000 barrels per day (bbl/d) Freeport, Texas, plant and Enterprise Products Partners’ 1.5 million bbl per month Houston Ship Channel LPG export terminal are now online.
According to EnVantage, these two projects will help to drawdown about 30 million bbl of propane from Jan. 1 to March 30. However, the company is forecasting propane inventories to remain very high at 65 million bbl by end of March. PIRA Energy Group reported that the arbitrage for U.S. LPG exports to Europe and Asia have improved due to the drop in propane prices.
The most profitable NGL to make at both hubs was C5+ at 61 cents/gal at Conway and 60 cents/gal at Mont Belvieu. This was followed, in order by, isobutane at 33 cents/gal at Conway and 29 cents/gal at Mont Belvieu; butane at 25 cents/gal at Conway and 28 cents/gal at Mont Belvieu; propane at 11 cents/gal at Conway and 14 cents/gal at Mont Belvieu; and ethane at negative 5 cents/gal at Conway and negative 2 cents/gal at Mont Belvieu.
The week of Dec. 18, the most recent data available from the U.S. Energy Information Administration, saw natural gas storage levels fall only 32 billion cubic feet to 3.814 trillion cubic feet (Tcf) from 3.846 Tcf the previous week. This was 17% greater than the 3.253 Tcf posted last year at the same time and 12% greater than the five-year average of 3.403 Tcf.
Frank Nieto can be reached at fnieto@hartenergy.com.
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