As we enter August, the winter of 2014 is a distant memory along with the gas shortages and high prices that it brought with it. The first week of August 2014 looks an awful lot like the same time last year with one key difference: even worse NGL prices and improved gas prices. It’s the worst of both worlds for NGL producers as frac spread margins are now worse off than a year ago.

It is hard to fathom that as late as this spring there were fears over the industry’s ability to reload gas and propane supplies as inventory levels were at their lowest in five years by winter’s end. However, mild summer temperatures have dramatically altered this story as storage levels are increasing at a rapid pace and should hit normal levels by the end of the injection season.

Not surprisingly light NGLs faced the most adversity in the marketplace as cracking outages and limited demand has resulted in price decreases for ethane and propane throughout the summer. Ethane in particular has struggled this season as cracking capacity is at its lowest level in more than a year due to both planned and unplanned cracker turnarounds. This has resulted in prices sinking 1% to close July at 24 cents per gallon (/gal) at Mont Belvieu and 19 cents/gal at Conway.

Propane prices are trending above last year’s prices due to increased LPG export capacity that came online earlier this year along the Gulf Coast. However, export demand has been decreasing as evidenced by the 3% decrease to $1.01/gal at Mont Belvieu the week of July 30. This was the lowest price since last year at the same time when it was 96 cents/gal. The Conway price fell 2% to $1.03/gal, its lowest price since it was $1.02/gal the week of June 11.

Heavy NGLs were more of a mixed bag compared to their price levels from a year ago. Butane prices were down at both hubs from last year with an 11 cents/gal loss in value at Mont Belvieu and a 7 cents/gal drop at Conway. The decrease in butane values was largely related to a downturn in LPG exports.

Isobutane prices were down from last year at Mont Belvieu, but were up slightly at Conway. Interestingly isobutane prices experienced large gains in the Midcontinent this summer and last for different reasons. This summer prices have been supported by record refinery runs, while last summer the region’s lone isomerization unit was taken offline for maintenance.

Pentanes-plus (C5+) prices were up from a year ago at Mont Belvieu and flat at Conway. However, both were down from the prior week as crude prices dipped below $100 per barrel (/bbl) for the first time this year.

The downturn in these prices resulted in the theoretical NGL bbl. falling 3% at both hubs with the Mont Belvieu price down to $39.70/bbl. with a 6% drop in margin to $25.57/bbl. The Conway price was down to $39.72/bbl. with a 7% drop in margin to $25.84/bbl.

The most profitable NGL to make at both hubs was C5+ at $1.68/gal at Conway and $1.72/gal at Mont Belvieu. This was followed, in order, by isobutane at $1.05/gal at Conway and 88 cents/gal at Mont Belvieu; butane at 81 cents/gal at Conway and 80 cents/gal at Mont Belvieu; propane at 68 cents/gal at Conway and 65 cents/gal at Mont Belvieu; and ethane at negative 7 cents/gal at Conway and negative 3 cents/gal at Mont Belvieu.

The main culprit in the larger downturn in frac spread margins was the somewhat surprising uptick in natural gas prices caused by a lower-than-expected storage injection. Conway gas prices rose 5% to $3.80 per million Btu (/MMBtu) while the Mont Belvieu price increased 3% to $3.87/MMBtu. The reason this was surprising despite the lower storage injection of 88 billion cubic feet (Bcf) the week of July 25 is that the reports from both the Energy Information Administration (EIA) and Genscape that domestic gas production reached a record level of more than 70 Bcf/d in May and July.

According to Barclays Capital’s Aug. 1 Energy Market Outlook, there is risk on the upside of gas prices as near-term normalized summer temperatures will not be able to offset the limited cooling demand from the previous two months.

“Moreover, production continues to grow quickly, as initial pipeline scrapes indicate production growth of about 3.45 Bcf/d year-on-year and 428 MMcf/d month-on-month in July, putting estimated dry gas production at its highest level ever on a monthly average basis. This notably strong production and cooler-than-normal weather have contributed to the continued narrowing of the storage deficit vs. last year, and has kept prompt prices depressed temporarily,” the report said.

It is increasingly likely that this storage deficit will not be very sizable despite the cold winter that depleted volumes. “We had a very severe winter and the only areas that look to be short are the producing regions,” Harvey Harmon, senior director, North American natural gas and global LNG at PIRA Energy Group, told Midstream Business. “The West is on pace to fill where it was last year, the East is a little less than that, but we still expect the East to get close, if not equal to last year. The region I’m most bearish on is the producing region. It looks like the one region where there will be significantly less volumes at the end of October this year compared to last year. The producing region is still overbuilt and the value of storage will probably go down.”

The consulting firm has said for the past few years that storage was overbuilding as production remains large enough despite a downturn in drilling rigs that it can quickly reload even after sudden and extended demand levels deplete storage levels.

Harmon said that this outlook could be altered if enough gas-fired power generation used enough storage capacity to balance supplies. “If you have storage, particularly in a producing region, gas-fired generation in our opinion is your best bet to use your capacity. Without that, I just don’t see the value of producing region storage improving in the near-term.”

Gas storage injection was 82 Bcf the week of August 1, according to the EIA. This increased storage levels to 2.389 trillion cubic feet (Tcf) from 2.307 Tcf the previous week and was 18% below the 2.927 Tcf figure posted last year at the same time and 2.997 Tcf five-year average.

Cooling demand can be expected to be uneven the week of August 12 as the National Weather Service anticipates cooler-than-normal temperatures along much of the East Coast – stretching from New England down to South Carolina – and extending out through much of the Midwest. However, this will be countered by warmer-than-normal temperatures along the West Coast through the Pacific Northwest as well as the Southwest along the Gulf Coast into the Southeast.

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