Frac Spread: NGL Prices Rise, but Outlook Joyless

With the exception of isobutane and natural gasoline at Conway, Kan., NGL prices rose across the board at Mont Belvieu, Texas, and Conway last week and, with the exception of Conway isobutane, margins improved as well.

If the results of this nowhere-to-go-but-up week spark joy then hold onto the feeling—you deserve it. It won’t last, however, because prices for NGL, oil and gas can and almost certainly will continue to fall.

“We are having a difficult time coming up with a scenario for higher crude prices in the near future,” EnVantage Inc. said in a report. “In fact, we can see crude prices going much lower. The severe demand shock that we are experiencing has not been fully captured by government statistical reports yet.”

EnVantage sees the possibility of U.S. crude supply declining by 1 MMbbl/d in the next three months. It won’t be enough, though, because domestic demand is on track to drop by 4 MMbbl/d.

Simmons Energy took a similar short-term view of natural gas in its takeaway of the U.S. Energy Information Administration’s (EIA) monthly data for January.

“Industrial demand should be biased materially lower in Q2 given economic malaise,” Simmons said. “On one hand, the near-term threats remain formidable (although shut-in oil production should help); on the other, the medium-term outlook for natty is exceptionally bullish given oil macro headwinds (2021 strip: +$0.22/MMBtu or 10% vs. a month ago).”

Two energy experts at Rice University’s Baker Institute for Public Policy also anticipate a recovery with the eventual passing of COVID-19.

“Where contract prices are indexed to oil we also should see a drop,” Anna Mikulska and Steven Miles, non-resident fellows in the Center for Energy Studies, told HartEnergy.com. “That being said for contracts, the drop will not be immediate but depending on the formula will happen with three to 12-month lag.” 

But when the economic slowdown eases, the experts can see an increase in gas demand supported by low prices and other factors including the shift from coal to gas for power generation in China.

“Some see even an increase in gas demand generated by a turn toward hydrogen generation where gas is used as a feedstock,” Mikulska and Miles wrote in an email to HartEnergy.com.

Ethane did perk up some at Mont Belvieu last week, rising 1.2 cents per gallon (gal) to just shy of 10 cents/gal, meaning that it was only the second-worst five-day average since Hart Energy began tracking NGL prices in 2006. In EnVantage’s analysis, the best approach is to get used to it.

“We see no major catalysts at this time to sustain a rally in ethane prices for several reasons,” the analysts wrote. They are—

• Turnarounds taking place at several ethylene are being extended according to our sources;

• It is likely that many petrochemical companies are reducing onsite staff and possibly reducing operating rates;

• Ethylene and ethylene derivative exports are likely being reduced due to narrowing export economics;

• Ethane exports could be compromised due to the slowdown in Europe and Southeast Asia, and the economics for cracking U.S. ethane in Europe and Asia are deteriorating compared to cracking naphtha; and

• 535,000 bbl/d of new fractionation capacity was to come online at Mont Belvieu in the first quarter.

“Bottom line, don’t trust any rally in ethane prices,” EnVantage said.

Mont Belvieu propane rose 5.3% last week and its margin floated up above 11 cents/gal. Propane has also experienced strong exports from the Gulf Coast, with the EIA estimating 1.4 MMbbl/d for the week ending March 20.

Again, hold that spark of joy tightly because it is ephemeral.

“The level of propane exports that have occurred in March were based on economic conditions and price spreads that were in place over one month ago,” EnVantage noted. “The net export margins from Mont Belvieu to Far East Asia for propane have been negative since March 10. The net export spreads to Northwest Europe from Mont Belvieu have also been negative for the same amount of time.”

The analysts at EnVantage don’t expect propane fundamentals to improve and expect upcoming shipments to be canceled. National lockdowns in India and other countries will crimp demand and result in a decline in NGL extraction.

The heavy NGL—normal butane, isobutane and natural gasoline—saw price increases but EnVantage warned of a “dead cat bounce.” The paralyzed U.S. economy and numerous lockdowns have shredded gasoline demand. Stay-in-place guidance from the U.S. Centers for Disease Control to April 30 could worsen gasoline’s predicament.

The butanes are suffering export cancellations, EnVantage said. If production does not decrease soon, prices will likely sink lower.

In the week ended March 27, storage of natural gas in the Lower 48 experienced a decrease of 19 Bcf, the EIA reported. The EIA’s figure resulted in a total of 1.986 Tcf. That is 76.8% above the 1.123 Tcf figure at the same time in 2019 and 17.2% above the five-year average of 1.694 Tcf.