Frac Spread: Markets Unbalanced By China Trade Fears

The last time the price of the hypothetical Mont Belvieu, Texas, NGL barrel was this low was immediately after the 2016 presidential election. The culprits now are pretty much the same as they were then: weakness in the ethane and propane markets.

“The inability for ethane prices to sustain a rally is a reflection that demand growth for ethane has not reached a level to offset the strong headwinds,” EnVantage Inc. wrote in a recent report. Among those headwinds are high ethylene inventories, planned maintenance turnarounds at two major plants; delayed start-ups of ethane crackers, low margins at some plants, and competition from propane and normal butane.

“It is hard for ethane prices to rally when n-butane and propane are more economical to crack even though the flexibility to crack more propane and butane is somewhat limited from current levels,” the analysts wrote. “But, when you add high ethylene inventories to the equation there is no reason for ethylene producers to drive ethane prices higher.”

Propane exports are strong—the average from the beginning of March through mid-May was 1.138 million barrels per day (bbl/d), according to the U.S. Energy Information Administration (EIA)—but the surplus persists, especially on the Gulf Coast, EnVantage said.

“To export more propane into the international markets, Mont Belvieu propane is likely to drop below 35% of [West Texas Intermediate (WTI)] price to induce naphtha crackers in Europe and Asia to crack more propane,” the analysts said.

It’s not there yet. In the holiday-shortened four-day Hart Energy tracking period, propane’s price was at 38.6% of WTI.

“Bottom line is that Mont Belvieu propane prices have more downside relative to crude,” said EnVantage. “Any serious disruptions to exports would cause major storage problems for propane on the Gulf Coast.”

WTI closed below $59/bbl on May 29, though it fell to a 13-week low earlier in the session. Geopolitics surrounding oil—civil way in Libya, falling production in Venezuela and Iran, assaults on Saudi tankers and oil installations—not to mention contamination from Russia’s Druzhba pipeline, should be driving global prices up. They are not.

It was a report in Chinese newspapers that hinted at a restriction in the sales of rare earth materials to the U.S. that rattled traders. Rare earths are 17 elements used in computer memory, rechargeable batteries, cell phones, catalytic converters, magnets, fluorescent lighting and many other products. They have been designated by the U.S. Geological Survey as critical to the economy and national defense.

Rare earths are not, in fact, rare but are found in relatively few areas on the planet and China dominates the global market. Escalating the trade war with the U.S. would increase the risk to the global economy, which would result in slower growth and less demand for fossil fuels.

In the week ended May 24, storage of natural gas in the Lower 48 experienced an increase of 114 billion cubic feet (Bcf), the EIA reported, compared to the Stratas Advisors prediction of a 97 Bcf increase and the whisper expectation of a 100 Bcf increase. The figure resulted in a total of 1.867 trillion cubic feet (Tcf). That is 9.1% above the 1.711 Tcf figure at the same time in 2018 and 12.1% below the five-year average of 2.124 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.