Frac Spread: NGL Prices Fail To Follow Crude’s Lead

NGL prices were largely flat the week of April 8 despite an upswing in West Texas Intermediate (WTI) crude prices. It is possible that the stagnant nature of heavy NGL prices was a reflection of this strength since demand for these products tends to dip in the spring shoulder season. However, should the crude uplift continue, it would be surprising if NGL prices did not start to improve as well.

WTI crude prices hit their 2015 high of $56.51 per barrel (bbl) on April 15 as fears over the Cushing, Okla., hub reaching full capacity have subsided. In addition, there have been positive signs from the geopolitical realm as several OPEC members including its richest member, Saudi Arabia, are reporting financial strains related to the cabal’s decision to continue with high production levels in the face of decreased crude prices.

Saudi Arabia posted its largest deficit in history—$106 billion, according to Jadwa Research, a Saudi Arabian research firm. This is its first deficit since 2011 and much greater than the $39 billion projected by the government. Another crude producing Arabian country, Yemen, is also facing security issues as insurgents captured an oil terminal in the nation.

In addition, uncertainty remains over the U.S. reaching an agreement to allow the construction of nuclear power plants in Iran. Should an agreement be reached, trade sanctions against Iran would lift, allowing greater trade of the country’s crude oil on the global market. However, failure to reach an accord would see the current sanctions continue against Iran.

Heavy NGL prices have yet to experience the same uptick as WTI crude. Instead heavy NGL prices were a decidedly mixed bag with C₅₊ down 2% to $1.20 per gallon (gal) at Mont Belvieu and up very slightly at $1.15/gal at Conway. It is likely that the downturn at Mont Belvieu is related more to the large surge in price to close March and the subsequent price rebalancing at the hub after the shortage in product to meet contractual demand was met. A price improvement in the coming week is anticipated if crude continues to improve.

Butane and isobutane prices were also a mixed bag. Mont Belvieu prices were largely flat, while Conway prices were down due to depressed demand for the products as refiners switch from blending winter-grade gasoline to summer-grade gasoline.

Propane prices managed to hold firm despite the fact that demand for the product seems to be flat at best. Storage levels continue to increase along the Gulf Coast and in the Midcontinent while LPG exports fell, according to En*Vantage. The investment firm reported that LPG exports were down by 127,000 bbl/d to 638,800 bbl/d the week ending April 10, based on monitoring of ships at major export terminals. The firm anticipates a further decrease of 3,000 bbl/d for the week ending April 17. Given this lessening demand and increase in storage it is likely that propane may be facing another price correction in the weeks ahead.

Though ethane prices have showed resilience for much of 2015, prices took a tumble this past week as several crackers, including Chevron Phillips Chemical Co.’s Unit 22 in Sweeny, Texas, and Dow Chemical Co.’s (NYSE: DOW) Unit 1 in Port Charles, La., underwent turnarounds. This resulted in a 9% decrease at Conway to 15 cents/gal and a 2% drop to 16 cents/gal at Mont Belvieu. Both prices were the lowest for 2015. Until cracking capacity runs at full throttle for a sustained period it will be hard for ethane prices to make a full recovery.

Given these prices, the theoretical NGL bbl failed to keep pace with gains posted by WTI crude as the Mont Belvieu price fell 1% to $21.98/bbl with a 1% gain in margin to $12.67/bbl. The Conway price decreased 2% to $20.69/bbl with a 1% drop in margin to $12.18/bbl.

Frac spread margins showed greater strength than the overall NGL price due to a downturn in natural gas prices based on limited heating and cooling demand. The Conway price fell 3% to $2.33 per million Btu (MMBtu) and the Mont Belvieu price was down 4% to $2.55/MMBtu.

The most profitable NGL to make at both hubs remained C₅₊ at 89 cents/gal at Conway and 92 cents/gal at Mont Belvieu. This was followed, in order, by isobutane at 40 cents/gal at Conway and 39 cents/gal at Mont Belvieu; butane at 34 cents/gal at Conway and 36 cents/gal at Mont Belvieu; propane at 26 cents/gal at Conway and 30 cents/gal at Mont Belvieu; and ethane at negative 1 cent/gal at both hubs.

According to the U.S. Energy Information Administration, natural gas storage levels increased by 63 billion cubic feet (Bcf) to 1.539 trillion cubic feet (Tcf) the week of April 10. This was 82% higher than the 847 Bcf posted last year at the same time and 9% lower than the five-year average of 1.684 Tcf. Storage levels should increase further as cooling demand will continue to be limited the week of April 22 when the National Weather Service anticipates colder-than-normal temperatures throughout the country.

Contact the author, Frank Nieto, at fnieto@hartenergy.com.