Frac Spread: Prices Rise But Margins Are Squeezed

With the average price of Henry Hub natural gas up 17.6% during the eight-day period since the last Frac Spread and the Mont Belvieu, Texas, hypothetical NGL barrel holding steady, post-Thanksgiving Day margins were creamed across the board.

Indeed, all Mont Belvieu NGL suffered double-digit setbacks, especially ethane, which absorbed a 34% reduction to 3.4 cents per gallon (gal). Isobutane emerged the least damaged with its margin narrowing by just under 12%.

Ethane prices moved up last week, rising 8.8% to return to a 30+ cents/gal territory at Mont Belvieu and 18.5% at Conway, Kan., to its highest point since mid-January. The lift, EnVantage Inc. said in a report, can be attributed to those surging natural gas prices—$4.48 per million British Thermal Units (MMBtu) at Chicago City Gate and $4.40/MMBtu at Henry Hub. Otherwise, reduced cracking demand and weaker exports would lower ethane prices, and the outlook is not terribly sunny.

“Over the next several weeks, there are very few catalysts to move ethane demand higher,” said EnVantage. “U.S. ethylene inventories are still high and polyethylene exports may be hampered by low crude prices and soft Asian markets. In this scenario, there is no incentive to significantly increase ethane cracking, especially in a low oil price environment where heavier feedstocks are competitive.”

Oil prices will stay in the low-$50s per barrel, EnVantage said, because bearish traders fear a supply glut in 2019 as the global economy slows. Only a report of declines in the inventories of gasoline and distillates kept prices from falling even more, the analysts said.

The U.S. economy could be in the early innings of a stumble as well. From the New York Times: “Emerging signs of weakness in major economic sectors, including auto manufacturing, agriculture and home building, are prompting some forecasters to warn that one of the longest periods of economic growth in American history may be approaching the end of its run.”

Another reason oil remains low is that the U.S. has pressured the Saudi Arabian government to refrain from production cuts. EnVantage speculated that overlooking the murder of Jamal Khashoggi, a journalist critical of the Saudi regime who wrote for the Washington Post, might be the leverage employed by President Donald Trump.

Natural gas prices have been driven by very low inventories heading into winter that could be exacerbated by lower-than-normal temperatures expected for the first half of December. The National Weather Service predicted a chill across parts of the Midwest and East as northern New England experienced a “heavy snow event.”

The colder weather has not had much influence on propane prices although Mont Belvieu’s price posted its first gain, albeit a slight one, in almost two months. EnVantage noted that inventories have declined more than expected as seasonal demand picks up. The analysts expect demand from Europe and Asia to keep exports strong through the end of the year.

A strong increase for propane would require sustained cold temperatures in the eastern half of the U.S. and the startup of Energy Transfer LP subsidiary Sunoco’s Mariner East 2 pipeline. But Mariner East 2, along with its cousin Rover, has been plagued with delays stemming from a much-higher-than-average number of state and federal violations.

“Any pipeline going through this area is going to face resistance which it would not have faced before,” Pennsylvania State Sen. Andy Dinniman told Reuters, indicating that completing future pipeline projects in the Marcellus and Utica shales will get even tougher.

In the week ended Nov. 23, storage of natural gas in the Lower 48 experienced a decrease of 59 billion cubic feet (Bcf), the EIA reported, compared to the Bloomberg consensus prediction of a 76 Bcf withdrawal and the Stratas Advisors expectation of a 70 Bcf withdrawal. The figure resulted in a total of 3.054 trillion cubic feet (Tcf). That is 17.4% below the 3.698 Tcf figure at the same time in 2017 and 19.1% below the five-year average of 3.774 Tcf.

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