Frac Spread: NGL Margins Improve As Heating Demand Falls

Natural gas liquids (NGL) frac spread margins improved across the board the week of March 10 at both Mont Belvieu and Conway as heating demand subsided, causing gas prices to crash. NGL prices largely held firm at both hubs.

Natural gas prices fell 42% to $4.59 per million British thermal unit (MMBtu) at Mont Belvieu and 41% to $4.64 per MMBtu at Conway. “Ukrainian crisis or not, gas fundamentals are becoming more bearish by the day,” according to PIRA Energy Group’s Weekly Natural Gas, Power and Coal Market Recap for the Week Ending March 9^th, 2014.

The biggest improvement in margin was for ethane, which turned positive at both hubs. Although this was the second time in three weeks this was the case, the market still needs to gain more strength before truly reaching profitability. The Mont Belvieu price actually fell 2% to 33 cents per gallon, which saw margins improve by more than 100%. Conway margins also improved by more than 100% as the price held firm at 34 cents per gallon.

Propane also fell in value due to the decrease in heating demand. The Mont Belvieu price was down 2% to $1.08 per gallon, its lowest price since it was $1.06 per gallon the week of September 25, 2013. The margin managed a 74% improvement due to the drop in gas prices. The Conway price decreased 1% to $1.12 per gallon, its lowest price since it was the same value the week of October 16, 2013. As with Mont Belvieu, the margin improved by a substantial amount—65%—due to gas prices falling. As liquefied petroleum gas (LPG) exports return to normal levels, propane prices should increase.

Heavy NGLs also experienced decreases at both hubs as they kept pace with West Texas Intermediate crude, which fell 1% to just over $100 per barrel (bbl.), its lowest level since February 14. According to Hart Energy’s Commodities Report for March 11, the Chinese economy is showing signs of a slowdown that will cut into crude demand. “[There was] an unexpected 18% decline in Chinese exports in February from last year left a trade deficit of $22.98 billion last month. The lack of support was evident throughout the entire energy complex as all nearby crude oil contracts fell more than $1 per bbl. The ongoing political conflict between Ukraine and Russia and tensions in Libya are keeping oil prices from even steeper declines, according to analysts. Traders, on the other hand, remain uncertain about long-term direction in the crude oil market, but are cautiously focusing on the potential to draw additional commercial and non-commercial buyers back into the market,” the report said.

The theoretical NGL bbl. price declined at both hubs with the Mont Belvieu bbl. down 2% to $42.40 per bbl. with an 81% improvement in margin to $25.64 per bbl. while the Conway price dropped 1% to $44.09 per bbl. with a 70% uptick in margin to $27.14 per bbl.

The most profitable NGL to make at both hubs was once again C₅₊ at $1.75 per gallon at Conway and $1.62 per gallon at Mont Belvieu. This was followed, in order, by isobutane at 88 cents per gallon at Conway and 85 cents per gallon at Mont Belvieu; butane at 71 cents per gallon at Conway and 78 cents per gallon at Mont Belvieu; propane at 70 cents per gallon at Conway and 66 cents per gallon at Mont Belvieu; and ethane at 3 cents per gallon at both Conway and Mont Belvieu.

Although gas prices were down this past week, they are likely to experience some sort of uptick in coming weeks based on the most recent storage levels reported by the Energy Information Administration (EIA). For the week of March 7, the most recent data available from the EIA, natural gas in storage decreased by 195 billion cubic feet to 1.001 trillion cubic feet (Tcf) from 1.196 Tcf the previous week. This was 49% below the 1.959 Tcf reported last year at the same time and 46% below the five-year average of 1.859 Tcf.

The shoulder season is quickly approaching as spring temperatures are taking hold throughout the country and lessening heating demand. The National Weather Service’s forecast for the week of March 17 anticipates slightly cooler-than-normal temperatures in the Northeast and upper Midwest, but this will be countered by warmer-than-normal temperatures in the Southwest.