Frac Spread: NGL Prices Rise, But Margins Are Squeezed

As Team Frac Spread eased into a tryptophan-induced coma during the holiday break, commodity markets were gyrating like an extra in an old Elvis movie.

They moved down, then up, then up again; then down, then again down, then up and up once more. By the time the seven trading days since this feature last published had passed, natural gas prices at both the Houston Ship Channel and Chicago Citygate hubs were 37% above where they started.

What drove the volatility? Probably a combination of a Donald J. Trump victory price boost and optimism about the upcoming production cut from OPEC. Whether confidence in the salesman-in-chief and in OPEC’s move can be sustained is difficult to gauge.

Especially the OPEC cut. As Stratas Advisors assessed, “as of right now ... this deal presents more questions than answers.”

A big question concerns non-OPEC producers. The Dec. 9 meeting in Doha, Qatar, is meant to resolve which countries will join Russia in a 600,000 barrels per day (Mbbl/d) cut. Stratas suggests that some fudging of this total may take place, for example, counting production declines in the U.S. and China as non-OPEC reductions.

There is also the possibility that Libya and Nigeria could try to fill the production void. Production has crept up in recent months in both countries.

Then there is the opportunistic U.S. shale E&P segment, which may be unable to resist a drilling splurge if WTI shows it can stay above $50/bbl.

The biggest question may be whether OPEC itself can maintain its own agreement, something it has struggled with in recent years.

NGL prices rose across the board during this trading period, but they couldn’t keep up with the price of natural gas, which squeezed profits. The margin of the hypothetical NGL barrel at Mont Belvieu, Texas, narrowed by 7.5% and at Conway, Kan., by 6.6%.

Nevertheless, the situation has improved from one year ago. The Mont Belvieu barrel is 16% above its price at the same time last year, and Conway’s barrel is up 21%. Mont Belvieu’s margin is 9.1% higher and Conway’s is 12.6% higher.

Ethane is on the cusp of a significant transition from supply push to demand pull, En*Vantage said in a weekly report. The analysts expect completion of LyondellBasell’s expansion of its Corpus Christi, Texas, plant to provide an additional 35 Mbbl/d to 40 Mbbl/d of ethane cracking capability. A mid-December shipment of up to 800 Mbbl of ethane from Enterprise Products Partners (NYSE: EPD) is scheduled for India’s Reliance Industries Ltd.

Ethane bounced up 10.5% at Mont Belvieu and 9.9% at Conway. Those prices beat year-ago prices by 22.7% at Mont Belvieu and 22.4% at Conway, but margins tumbled 39% at Mont Belvieu and 94% at Conway since the week before Thanksgiving.

December should be ethane’s first month of transition, En*Vantage said, but warned that “the transition to a demand pull market can be prolonged and quite choppy.”

Stronger-than-expected imports and warmer-than-expected weather bumped propane inventories higher. Mont Belvieu’s price was up 4.1% and Conway’s was up 4.8%, though both were significantly above the year-ago price.

Butane rose at both hubs, as did C₅₊, though natural gasoline’s strength faded after the midpoint in the trading period.

Storage of natural gas in the Lower 48 declined by 50 billion cubic feet (Bcf) in the week ended Nov. 25, the U.S. Energy Information Administration reported. The decrease, which matches the Bloomberg consensus average prediction, resulted in a total of 3.995 Tcf. It is more than the year-ago withdrawal of 44 Bcf. The total is a 0.6% increase over the 3.971 Tcf figure at this time in 2015 and 6.3% above the five-year average of 3.76 Tcf.

Joseph Markman can be reached at jmarkman@hartenergy.com and @JHMarkman.